Make no mistake about it - Tuesday 4th October is a critical day for everybody connected with Apple (NASDAQ:AAPL). It's a critical day for Apple fans because we all get to see the new iPhone we’ve been reading (or dreaming) about for the last 16 months. It’s a critical day for AAPL investors because we get to see the latest version of Apple’s most important product - accounting for 45% of revenue earned in the first 9 months of the company’s fiscal year 2011. But it’s also a critical day for Apple’s new CEO Tim Cook as he takes to the stage for possibly the biggest keynote speech of his life.
Here are three reasons why Cook is facing an unenviable and daunting task today:
1) There is likely to be as much attention focused on Cook as the form of the product he will wave aloft at the appropriate moment. We’ve seen him present before, but this time is different. Every word he utters, his body-language, his poise, his charisma, the way he dresses – all of it will be compared to his predecessor Steve Jobs.
2) Talking of Steve, there was a new rumour today that Jobs himself may attend the event, even if he does not feature in the keynote. If he did attend in any form it will only add to the immense pressure Cook will face, and make his task of succeeding Jobs more difficult. Note that there is already a counter-rumour that in fact he is too ill to attend.
3) There is a major risk of disappointment at the physical form of the new iPhone and the lack of a brand new low-end phone. Recent rumours have gone into overdrive – first it was a possible tear-drop shape that got fans salivating; then it was a new low-cost phone which got investors clamouring to buy the stock, sending it to new highs in the face of a tough market. As counter-rumours of only one phone have surfaced – and possibly a hint from Apple themselves – the stock’s relative strength has failed and we’re currently in the midst of a sharp pullback.
For Apple investors, it will be interesting to see how the stock reacts, so let's examine each of the above in turn, before drawing some conclusions:
1) Inevitably, and sadly for Cook, most comparisons with Jobs will be unfavourable. Cook is not the showman that Jobs was. Operationally he is a genius, but the Apple CEO role demands charisma and charm in a way that will stretch him, and in doing so, may disappoint Apple’s legion of die-hard fans. In the short term, it will matter little as long as the new iPhone does not disappoint. But Apple will be keen to preserve the unique excitement associated with a new product launch, and if Cook’s performance is less than stellar, the whispers may start that ‘Apple is losing its magic’.
2) Cook needs to establish himself in the CEO role now that it has been made official; I would be very surprised to see Jobs in attendance in any form, whatever the rumours may say. It would simply undermine Cook’s efforts to make his own mark and set out his own style of leadership. In fact, the signs are already there that this product launch is going to be much more low-key than Jobs’ keynotes. Already, we have the smaller, more intimate venue.
This will mean key media and bloggers will be there, but far fewer Apple developers. Expect fewer – if any – whoops and hollers from the crowd unless a surprise is unveiled. Perhaps a give-away on that front is that Apple PR has confirmed that there will NOT be a web cast of the launch. Read into this what you will, but this would seem to concur with the general view that this is not going to be a spectacular show.
3) If the hardware does – or is perceived to – fall short, then expect the first whisperings of discontent from both investors and Apple fans along the lines of ‘Steve would not have been happy to launch this after 16 months R&D’. If the phone is on the money then Cook will have longer to prove himself (and note by ‘prove’ I mean in his new role as CEO, not as an Apple executive). My view, having sifted the vast collection of ‘evidence’ and rumour out there, is that Apple will release an iPhone 4S with the technical specs we expect, but that it may not have the stunning new design many are hoping for. I also believe that an 8GB iPhone 4 will be released as the ‘low-end’ phone many are predicting, but aside from world-mode capability it will, in essence, be identical to the current models.
So what conclusions can we draw with regards to (a) Tim Cook and his future as CEO and (b) what Apple investors should do ahead of, and post, the event?
a) Cook is in a honeymoon period of sorts right now. He’s proved himself capable of deputising in the CEO role; he’s proved his operational genius, and Apple in his own words is ‘firing on all cylinders’. But investors would do well to consider what can go wrong and just how quickly things can turn around.
Forgive the political analogy, but in the UK we had a very famous and charismatic Prime Minister – Tony Blair. In June 2007 he stepped down, making way for Gordon Brown, who had been lined up as successor for many years. At the point of handover, the economy was doing well, the Labour Party was still in power, and everything seemed to be going just fine. Where Blair was charismatic, Brown was dour, serious, and almost the opposite of his predecessor. However, he was regarded as the operational genius behind the Labour Party, the man who had eradicated ‘boom and bust’ from the UK economy. Everybody knows what happened next. The recession hit, disproving Brown’s amazing gift. A series of unexpected problems occurred, as well as a series of well-reported PR disasters, and Brown’s leadership was called into question. By May 2010 he had resigned as PM after a poor election result.
The character similarities between Blair and Brown / Jobs and Cook, are uncanny. As is the similarity in the health of their enterprise at the time of leadership transition. Now I am not saying that Tim Cook will make any major PR slip-ups of the kind that befell Gordon Brown; however, unexpected operational problems at Apple cannot be ruled out. How many of you have heard of Jeff Williams, Cook’s replacement in Operations? We only need to think of Antennagate to know that things can and do go wrong. Cook is going to have to trust that Williams can maintain his strong operational legacy.
The Washington Post recently explored Tim Cook’s succession, commenting that:
It’s tough as a new CEO to fix a troubled company suffering under a legacy of misleadership, as Meg Whitman is about to learn at Hewlett-Packard (NYSE:HPQ). But it’s even tougher to follow in the footsteps of an icon—a leader who didn’t just win big with the company, but changed the industry’s game.
In the medium to long term Cook will undoubtedly face major challenges which will determine whether he sees out the 10 years expected of him by the Apple Board.
b) As I wrote this, Apple stock is currently languishing below its 50 day MA and the general market situation is dreadful. Fortune Tech reported that Andy Zaky has written a piece outlining Apple’s performance around the time of iPhone launches. It suggested that the current stock performance was an anomaly of the usual trend of ‘buy on the rumour, sell on the news’, and that perhaps the opposite would happen this time around.
I agree that much of any disappointment in today’s launch has already been factored into the share price. However, I cannot see any immediate catalyst for the stock unless we get a surprise of two new iPhones. Siri’s (NASDAQ:SIRI) voice assistant may well prove to be a game-changer, but don’t be surprised if the Street decides to focus on the lack of a low-cost iPhone instead.
For Apple traders, it is prudent to remember that regardless of Apple’s strength in Macs and iPads, 45% of revenue comes from the iPhone. Gene Munster of Piper Jaffray said in an interview Friday “To get the stock right over the next year, they have to get the iPhone right”. Let the dust settle tomorrow, see what Cook has in store, and then consider Long positions ahead of Apple earnings. For Apple investors, continue to hold shares whilst the longer-term trend of revenue and EPS growth continues.
The bottom line – With no surprises, I believe Apple stock will continue to trade with the market – should that be up or down (and it sure looks ugly out there right now). The real ‘pop’, should one come, will be with the earnings announcement on October 18. As we are all aware, Apple is trading on less than 15x current earnings estimates, and if the stock stays where it is, it could be as low as 12 come earnings day. Whatever happens in the market between now and then, I would be very surprised to see Apple’s P/E much lower than it is currently. Long-term support sits at the 200 day MA around $353 and that should underpin the stock barring any market meltdown.
Disclosure: I am long AAPL.