It's been a few months since I wrote about Apple (NASDAQ:AAPL) so I wanted to update investors on my Apple sentiment as 2Q 2014 approaches its final week. In this update, I'd like to address Yukari Iwatani Kane's Haunted Empire, in which the author contrasts the Steve Jobs era to that of Tim Cook's. For those who haven't read the book or its reviews, Kane's sentiment isn't positive. When asked where she sees Apple heading in a few years by a New York Times reporter, Kane responded as follows:
At the end of the day, Apple is just as mortal as everyone else. If Apple stays on the current trajectory, I think the danger is that it could turn into Sony (NYSE:SNE).
As I reviewed Kane's interviews further, I wondered if she actually understood Apple since her material seemed fairly controversial (read: unfair, biased) and her arguments appeared unconvincing.
Here's an excerpt from Kane's book as it appeared in Fortune's review:
The story follows an archetypal pattern-a pattern familiar in both history and myth. A struggling empire, on the brink of dissolution, recalls one of its founders from exile and casts him as a savior. The ruler, ruthless and cunning as Odysseus, gathers the faithful and emboldens them to take startling risks that allow the empire to reach even greater heights than before. Amid the celebrations, the emperor grows sick. Knowing that he is the living embodiment of his kingdom's fortunes, he tries to hide his illness until he is finally forced to accept that he is not immortal. Left to carry on in his name, the emperor's lieutenants fall prey to complacency and confusion, lapsing into disarray and paralysis. Bound to the way things have always been done, these new leaders become less flexible and ignore the warning signs. Their emperor is gone, but ever present. Though they are still at war with enemy armies, these lieutenants cannot find their own way forward. They are tired. They are uncertain. The well of ingenuity has run dry.
She continued in a New York Times interview:
[Apple's] promise is to be exceptional - to make insanely great products that change the world. The latter is difficult to do without Steve Jobs's reality distortion field. In its absence, Apple is simply less convincing. If Apple lowers its bar of success to something closer to that of its competitors, then it could continue to do "great." But then you're talking about a great company on a more ordinary scale. And, likely, with lower profit margins to match.
The book drew sharp criticism from Tim Cook as he reacted by stating the following:
This nonsense belongs with some of the other books I've read about Apple. It fails to capture Apple, Steve, or anyone else in the company. Apple has over 85,000 employees that come to work each day to do their best work, to create the world's best products, to put their mark in the universe and leave it better than they found it. This has been the heart of Apple from day one and will remain at the heart for decades to come. I am very confident about our future. We've always had many doubters in our history. They only make us stronger.
So is Apple really doomed?
While Kane admits that in terms of profits and revenues, Apple continues to be successful, she nevertheless concludes that Apple is less convincing without its former leader, Steve Jobs.
Someone should remind Kane that from periods of 2002 until the end of 2010, when Steve Jobs was CEO, the company's revenue increased from $5.74B to $65.2B, CAGR 35%, a very impressive feat.
But during the next three years, with Tim Cook as CEO, Apple climbed by an average annual growth rate of 37%! Yes, that is more than what Jobs was able to accomplish. That doesn't mean that Apple will continue growing by 30+%, but that has little to do with Jobs - and more to do with the hefty size of Apple's already enormous revenues.
What's fascinating is that Kane decided to go after a CEO and a company that have come a long way since Jobs died, a company that currently boasts a TTM revenue figure of $174B, almost equal in size to FOUR other companies among the Nasdaq's most valuable firms, combined, and this is all under the leadership of Tim Cook! Those companies are Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), Qualcomm (NASDAQ:QCOM) and Facebook (NASDAQ:FB), which have TTM revenues of $83.4B, $59.8B, $25.5B, and $7.9B, respectively, or a combined $176.6B.
The insinuation among those like Kane that Cook has to punch out new gadgets ASAP or risk leading Apple into the ground is old and fairly amateurish, a one dimensional view, if you will.
Instead of redirecting his focus on new low margin gadgets - Cook's focus was spot on! He directed capacity and resources towards creating great products - in the form of iPhones, by far Apple's highest margin products - and placing them in the hands of populations around the world. In fact, between 2011 and 2013, Apple sold close to 350 million iPhones! Under Jobs and until the end of 2010, Apple sold only 74 million.
Someone should remind Kane that all those hundreds of millions of "insanely great products" called iPhones were created and sold after Jobs died. How much more convincing does she expect Apple to be? 350 million iPhones!
This then begs the question: does Kane actually understand Apple's value proposition? Apple doesn't just sell cool gadgets to consumers. Samsung (OTC:SSNLF) does that.
Apple sells products that encompass a revolutionary and attractively designed ecosystem. By creating the ecosystem as its nucleus, Apple empowers tens of thousands of the world's most intelligent employees and some of the most talented app developers to expand and improve its ecosystem. Apple's products are then built around this ecosystem. This nucleus is bigger than anything Jobs would have created and it continues to expand exponentially. I project this "ingenuity" will have a hard time "running dry."
- The smartphone market continues to explode globally and the iPhone will likely be there to capture some country's market share.
- Rumors continue to swirl that the iPhone 6 will be offered as a larger screen phone - which would make Apple's penetration into this high margin space even greater.
Additionally, the Apple TV still remains an opportunity Apple could exploit in years to come. Unfortunately, Apple has to work with companies like Comcast (NASDAQ:CMCSA), which have set some tough barriers to entry inside the cable space. Once those barriers are shattered (which I admit will be tough), Apple's living room opportunities will explode.
There's no question that the world's most valuable brand will come under attack by analysts, pundits, authors, and competitors. The job of the investor is to question not only the material these individuals publish, but their intentions as well.
For example, Kane's prediction that Apple might turn into Sony, if it doesn't change its course, to me seems shocking. Sony doesn't have an ecosystem. Sony sold and continues to sell boxes with electric wires inside. With time, competitors caught on and also sold boxes with wires inside. Sony didn't have millions of developers working around the clock to make it a more powerful network. Sony wasn't working with cable companies to offer TV services through its boxes. Sony didn't do many of the things that Apple has done exceptionally well. Sony also didn't have $160 billion sitting in its treasure chest (much of which was generated by Tim Cook by the way). So a question for Ms. Kane: Why and how would Apple turn into Sony?
Please message me with any questions or feedback.
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. This article represents my views only and not the views of any company that I am affiliated with. This article is intended for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation, or endorsement to buy or sell any security or private fund.