Apple's (NASDAQ:AAPL) is not perfect, and there are areas for reasonable criticism. Yet, it seems that there have always been detractors who will go to any length possible to try to bring the iCompany down. They have never released a new product, from the iMac to the iPod, iPhone and iPad, that was not greeted with ridicule and scorn. Detractors continue, between product launches, to try to paint pictures of gloom.
The latest report out of Global Equities Research, however, has to be one of the most absurd pieces of work on the topic that I have ever seen. It is a virulent attack on CEO Tim Cook, calling for his replacement. The story has been picked up by several news blogs, including Investors Business Daily "Apple CEO Tim Cook should hit the bricks, analyst says" (here).
Here, I will show how the analysis in that report is contrived, and the logic totally fallacious. In an earlier article, I outlined how one must be careful in how data can be misinterpreted by some writers, either by sloppy thinking or by letting one's bias get the best of you. This post continues in that vein, showing how data is cherry-picked to suit the argument.
Arguments can look very pretty and convincing, but a critical analysis can reveal the errors in such a report. I will address their report point-by-point, and show how every single one is fallacious.
Not Apple's best days
Granted, the authors are correct that from an investor's point of view, these are not Apple's best days. It is true that the current share price is down roughly 23% from its high of $702 in September, 2012. Apple has gone through many retractions over the years, but this is both one of the largest drops (aside from the 2008 recession) and the longest recent one - about a year and a half, so far.
While I believe that Apple is currently undervalued (and Carl Icahn is not bad company in agreeing here), it is understandable that many investors are concerned with margins that have fallen significantly since 2012, and how competition has grown - from Google's (NASDAQ:GOOG) Android mobile operating system and from Windows Phone 8 by Microsoft (NASDAQ:MSFT). As competition grew and new products came out with inherently lower margins, it is natural that uncertainty would arise, and uncertainty leads to anxiety, and this to reduced demand for the stock.
There can certainly be a good argument made that Apple should have introduced an even lower-priced model this last round to make headway in developing markets and block the market share grab by Android.
Other ideas are worth considering, but the arguments of the report referenced here are so out of line with reality that it must be called absurd.
The authors compare Apple to Enron:
Apple shareholders have lost confidence in Apple's CEO and CFO - Destruction of $130 Bil of Apple's Shareholder value is more than 2x the destruction of Shareholder value at Enron... Apple's destruction of shareholder value is much larger and has occurred in just over 12 months.
This is the beginning of the absurdity. When Enron lost $63 B, they lost virtually all of their value. Apple is down 23% from its all-time high. The comparison makes no sense at all. Enron went bankrupt because of corrupt practices by the managers. No one is suggesting this of Apple.
And it is just plain wrong that investors lost confidence "when $63 Bil was destroyed at Enron." Enron lost the value precisely because investor lost confidence in corrupt management.
Apple's lost value
The report shows the following graph and comment.
...while other stocks and broad indexes have created large amounts of shareholder wealth in the last 12 months, Tim Cook and Peter Oppenheimer have systematically erased $130 Bil of shareholder value.
This is actually not true. It is patently false on a couple of counts.
It is true that the market cap is down about 23%, or $130 B from its high in Sept. 2012 (the time frame of the graph), but not true, as they state, "in the last 12 months." In fact, in the last twelve months, Apple is actually up 23%, still behind the NASDAQ, but beating the SPY.
You can see the 12-month comparison chart, along with other related charts that illustrate how arbitrary the decision was to use this particular time frame.
The fact is, if you take any stock, it will have "lost shareholder value" on any day that it has not just set a new high. Granted, 23% below is quite steep, but still, the day you chose to start your comparison is rather arbitrary and typically selected to prove some point. Many stocks that have run up get ahead of themselves and have corrections. Intel is down 65% from its high in 2000. Should we call for Mr. Krzanich to be fired?
My question is, why do the authors choose the highest stock price ever as the starting point? Did Cook and Oppenheimer inherit this stock price when Cook took on the role of CEO? No, actually the price then was about $375, so Apple is up 40% since then, and Tim Cook has actually added roughly $140 Billion to shareholder value since taking over. (See more charts here)
For years, detractors have been clamoring that Apple cannot continue to grow forever, that competition will cut margins. Now that the margins have dropped, they want to blame it all on Tim Cook. Strange.
Another strange and illogical argument
The authors next attack Apple CEO, Tim Cook personally. In a contrived and convoluted argument, they say:
- Tim Cook's compensation and incentives are for NOT maximizing the value of Apple stock until August 2016.
Whether or not Cook's compensation package provides direct incentives for him to increase the share price, to suggest that he is driving Apple solely according to his personal best interests, and that the board of directors is blindly following along is not only absurd, but insulting. Not only is it insulting to Cook's integrity, but also to the board of directors, suggesting that they would allow any supposed mismanagement.
They argue: "This 47 million share-buyback, enabled Apple's stock to cross $500 during the vesting time in August 2013, from a low of $394 at the end of June 2013." (This was a period in which Cook vested shares.)
I would ask them, when exactly is the best time to authorize a share buyback - when the price is high? With shareholders clamoring for dividends and buybacks, now Cook is faulted for doing exactly what they ask? Another strange and illogical argument.
- Apple developer community-at-large has lost confidence in Apple CEO - No new Products and Zero Innovation
Last year, Apple returned over $8 BILLION to App Store developers. This is greater than the amount of all previous years combined! I really have trouble believing that very many developers are so dissatisfied! Of course, undoubtedly some are. With more than 50,000 developers, there are bound to be. Remember, you cannot please all of the people all of the time. As for developers leaving to support other platforms, developers change jobs, especially when there are new platforms. So what's the big deal? I do not see any mass desertion of developers.
The last data I saw said that in spite of Android owning 81% smartphone market share, the average Apple app earns roughly 5 times as much. Not sure why developers would be so unhappy here.
As for innovation, here are just some of the innovative products/features this past year:
- iOS 7 - scores of new innovations
- The astounding new Mac Pro
- Touch ID
- A7 64-bit processor
- iPad Air
- OSX Mavericks
The report states:
- Apple developer community sees zero innovation under Tim Cook, and the majority would like to see him replaced
On what basis do they make this statement? Has there been any survey to this effect? It seems highly improbable that so many developers would want to see Cook replaced. As such it is, at best, a flamboyantly unsupportable, misleading statement.
The report argues that Apple has lost the lead advantage in iBeacon technology, that Qualcomm has taken the lead with its Gimbal platform.
Hogwash! Why should Apple rush into a market for devices that the report admits cost only from $20 down to free? They are selling the $600 iPhone that works with the systems - including Qualcomm's.
As announced earlier by MLBAM, the first two ballparks to have iBeacon hardware installed are Petco Park in San Diego and Dodger Stadium in Los Angeles. These initial ballparks have been permanently equipped with a total of 65 Gimbal proximity beacons with iBeacon technology, a technology introduced with iOS 7…
The Gimbal beacons that will be used work only with Apple's iOS 7, but on any iPhone from the 4s onward. Most Android phones are not capable of this at this time (see this post). One of the things that may be possible at the stadiums is that users will be able to vote on various plays, and the results will show up on the scoreboard. If so, this will essentially be live compelling commercials for the iPhone at every game. Android owners will be sitting there going "Why can't I do that?"
So this argument of the report also is completely out of touch with reality. It's not even in the ballpark.
The solution that the report presents is that:
- We think Jon Rubenstein [sic], the Father of iPod as CEO, and Fred Anderson, the prior Apple CFO, would be best to turnaround the destruction of shareholder value at Apple.
I had to check if it was April Fools' Day. I have a lot of respect for Jon Rubinstein (the report spells his name incorrectly). He is certainly a talented, creative person. He led the design of the Palm Pre, and became CEO of Palm up until the time it was saved from bankruptcy by a purchase by Hewlett-Packard (NYSE:HPQ).
Where could anyone get the idea that Rubinstein would be a successful leader of Apple, the largest company in the world (by market cap), given his last experience?
New products - stock price
Investors in Apple should understand one thing:
- Apple has never run itself to please the stockholders.
Apple has always run itself with one thing in mind - to create insanely great products. This has been (at least since Jobs returned) the one and only guiding principle - the object of total focus.
Paradoxically, it is precisely this disregard for the market and focus on their products that has earned them the position they have, with an almost 100X return from their low in 2002, becoming the largest (by market cap) and most respected company on earth.
The message here to the investor is this. There are those who will always be detractors of Apple. This does not mean that all criticism is without value, Apple is not perfect. (The initial release of their Maps was pitiful, as just one example.) But one does need to look at reports such as these critically.
These are professionals who promote and argue well and convincingly. They make statements with conviction. It is easy to be taken in. If we look closely at what they say, however, the logic falls apart on every single issue. We can see that, in this case at least, the arguments are fallacious, the reasoning tawdry, and some of the supposed facts very dubious.
Apple is moving ahead. The ultra-high margins of the early iPhone era reflected the high margins of that product. The ASP for the iPhone remains high - near $650, but the iPad has a lower margin, particularly on the Minis. This is natural and was to be expected. Falling margins cut profits in spite of increased revenue over the last year and a half.
Margins appear to have stabilized, however, at what is still an enviable rate for what is essentially a hardware company. The iPhone 5s has been a huge hit, and moving the 5 to a plastic case to become the 5c has cut costs. Therefore, now, increased revenues will likely result in increases to the bottom line.
There are plenty of rumors of new products coming down the line, but with Apple, it is usually best to wait for the official introduction before counting on anything. Yet, even without new products, there is still growth in the iPhone, iPad, and Mac lines.
As for new products, Apple is taking its time. They do not rush for the sake of analysts like the authors of the Global Equities report. As with the Touch ID, and the A7 processor, and iBeacons, as with the iPod, iPhone, and Mac Pro, Apple will release new products when they are ready, when they have been perfected, when it is the right time. And in the end, THIS will be in the best interest of shareholders.
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.