Seeking Alpha
Long only, special situations, contrarian, growth
Profile| Send Message|
( followers)

For most public companies, CEOs may be an important part of the business, but the success of the company is not tied to that single person. And CEOs are rarely deeply in touch with the historical roots of the company in question. Apple (Nasdaq:AAPL) breaks these patterns, something that seems to be the company's standard practice. Steve Jobs co-founded Apple, and became not only deeply tied to Apple, but became a fixture in American culture. With his untimely passing nearly a year ago, questions have swirled around whether or not Apple can remain as successful as it has in the past under the leadership of Tim Cook.

So far, this seems to remain the case. Apple's stock seems to make new all-time highs each day, and is now hovering near the $700 mark, firmly securing the company's place as the world's largest company by market capitalization. And the iPhone 5, which goes on sale on September 21, has been well received by reviewers, and is set to be one of the most successful consumer electronics product launches in history.

But what makes the iPhone 5 truly meaningful is not that it will be the most successful iPhone to date. The iPhone 5 is meaningful because it likely marks the end of the Steve Jobs era at Apple. Going forward, Apple will no longer be able to rely solely on the creative vision of Steve Jobs, and investors will need to evaluate the market potential of Apple's products in a different way.

The End of an Era?

Steve Jobs was more than just Apple's CEO. In many ways, he was Apple's chief visionary, and always seemed to be one step ahead of the company's customers in knowing what they wanted. Jobs was much more involved in the company's day-to-day operations than most CEOs of Fortune 500 corporations. During his tenure as CEO, Jobs was involved in the development of every product that Apple sold, and that is one aspect of what has led Apple to where it is today. But now that Tim Cook is in charge, will this remain the case?

By all accounts, Tim Cook is an intelligent man, and a master of managing supply chains and logistics. But Tim Cook does not seem to be a "product guy," a sentiment expressed by Steve Jobs in Walter Isaacson's biography. So far, this has not proven to be an issue. The iPhone 4S, despite early criticisms, was a great success; the new iPad was as well, and the iPhone 5 is set to once again prove that Apple is the leader of the smartphone industry (at least when it comes to profits). But, the truth is that while Tim Cook may have been CEO when these products were announced, he was not critical in developing them.

Multiple reports indicate that Jobs was deeply involved in the creation of the iPhone 5. Given the importance of the iPhone to Apple's bottom line, it makes sense that Jobs was involved in the design of the next two versions of the iPhone in his last days as CEO (as many Apple investors and fans remember, the iPhone 4S was released one day before Jobs passed away). As such, it is highly likely that the final design and specifications of the iPhone 5 were based on input from Jobs.

And therein lies the fact that the iPhone 5 is likely to be the last major Apple product to be created with input from Steve Jobs. From here on out, the buck will stop with Tim Cook. When the iPhone 6 comes out (or possibly the iPhone 5S), it will bear the seal of Tim Cook, not Steve Jobs. The same goes for a potential Apple TV. Given the fact that Apple creates product concepts years before actually releasing them, it is highly likely that Steve Jobs has telegraphed his vision of what an Apple TV should be like to Apple's current executive team. However, Apple's products often change dramatically between the conceptual and finished stages. And because Steve Jobs can no longer provide input on the Apple TV, the finished product, if it does indeed exist, will be based on how Tim Cook and his lieutenants want it to be, a vision that may very well differ from that of Apple's co-founder.

On the Lookout for Warnings Signs

Are we suggesting that Apple is slipping, or losing its position as the leader in the smartphone, tablet, or computer industries? The answer is a resounding no. At the moment, there is little, if any proof to suggest that Apple is abandoning the "philosophies" of Steve Jobs. But nothing in investing is guaranteed. No one can say with certainty that the Apple of 5, 10, or 15 years from now will be the way that Steve Jobs would have wanted. In the quarters and years to come, we believe that there are several things that investors should watch for, things that may serve as warning signs that Apple is becoming something that it should not.

  1. Apple starts attending investor conferences regularly: Steve Jobs's attitude towards Apple's investors can be described as cold-shouldered at best, and disdainful at worst (as with many things involving Jobs, opinions tend to be at the extremes). And that is just one of the ways that Apple has been able to create hundreds of billions in shareholder value since Jobs returned in 1997. Steve Jobs focused on products and the user experience, not dealing with the concerns of investors. During the press conference regarding the iPhone 4S "Antennagate" controversy, Jobs stated that "you invest in the company we are," and refused to apologize to investors. So far, Tim Cook has largely maintained this approach to dealing with Apple's investors. While Cook did attend a Goldman Sachs technology conference back in February, that has remained his only conference appearance since becoming CEO. We believe that this should remain the case. Tim Cook's time should not be spent rehashing the Apple "story" to analysts and investors. Given that Apple is the most widely covered stock in the market, everyone should already be familiar with the Apple story. Attending investment conferences is not the issue. Rather, the issue is what it represents. If Apple starts caring about investors, the market, and its stock price in a more explicit way, it sends a strong signal that Apple suddenly cares about the financial aspects of its business, when much of what has made Apple so successful is obsessing over its products, and largely ignoring the financials. While it is true that CFO Peter Oppenheimer meets with analysts on a semi-regular basis (he met with ISI and Pacific Crest in August), this is part of Oppenheimer's job. Aside from retail chief John Browett, he is perhaps one of the only executives at Apple whose responsibilities do not cover the creation or oversight of new products. That is not to say that Oppenheimer is not essential to Apple. Since joining Apple in 1996, he has proven himself to be a capable and adept executive. Apple's renaissance after the return of Steve Jobs did not occur simply because Jobs returned. The hiring of Tim Cook to oversee logistics played an instrumental role, as did the appointment of Oppenheimer as CFO to oversee Apple's healing from a financial standpoint. This leads directly into our next warning sign.
  2. Rumors about Oppenheimer's changing role: Apple makes every effort to shroud itself in secrecy, and this philosophy goes beyond the company's products; it extends to the company's management as well. And yet, investors can often peer into the world of Apple's management, just as they can peer into its product pipeline, thanks to leaks and journalistic sources. For example, an extensive BusinessWeek profile of Scott Forstall, Apple's VP of iOS software, reveals that he has a very tense relationship with Bob Mansfield and Jonathan Ive, Apple's head of industrial design. Such news stories offer valuable insight into the way that Apple's management team runs the company and interacts with one another. With regards to CFO Peter Oppenheimer, Apple investors need to be on the lookout for rumors about his changing role, specifically how far his oversight over financials extends. One of the key differences between Apple and Microsoft (NASDAQ:MSFT) is that at Apple, there is only one person responsible for P&L (profit and loss). That person is CFO Peter Oppenheimer. Apple's various divisions are charged with making great products, not worrying about every penny. It is this focus on ignoring costs that has allowed Apple to generate the profits and revenue it has. This stands in stark contrast to Microsoft, which, as we have stated before, seems to design everything through an Excel spreadsheet of financial data. Managers at every level of the company are tasked with monitoring costs, and this is one of the reasons that Microsoft has lagged its peers, in terms of both innovation and stock price. We would be worried if rumors start to surface that division managers at Apple are suddenly required to monitor costs, something that is currently the purview of CFO Peter Oppenheimer. Were he to lose a portion of his authority over Apple's finances, it would imply a shift in Apple's focus to caring more explicitly about financial metrics, which we think would be a negative for the company.
  3. Emphasis on profit in retail stores: Apple and retail chief John Browett generated controversy earlier in August when reports surfaced that the company was slashing hours for its retail store employees. Apple refuted those claims, and the staffing reductions appear to have been reversed, according to sources close to Apple. But, worries are still persisting that Apple is turning its stores, long considered to be the "gold standard" in retail, into a profit machine. An op-ed by Ars Technica argues that Apple is in fact shifting towards an emphasis on retail store profit, and away from service, which would be dangerous. So far, there has been little in the way of concrete evidence to suggest that this is in fact the case. Furthermore, Apple's retail stores already generate more sales per square foot than any other company in the world, including Tiffany's (NYSE:TIF). Apple's retail store profit margin, however, is 22%, a figure that Browett may be trying to raise. However, it is important to remember that Browett boosted salaries in the retail division by 25% earlier this year, something that runs contrary to the goal of raising the profitability of retail stores. In addition, it is important to remember that Apple's stores are no longer as essential to the company as they were even a few years ago. When the first Apple store opened in 2001, it was seen as a way to reach a wider audience and grow the Apple brand. 11 years later, this need no longer exists. Apple is ubiquitous, and most sales of Apple products occur either online or through other retail channels. However, that is not to say that we do not view a potential shift in focus to profit as a negative. This would be a negative not because Apple is changing its retail stores, but because of the wider message that it sends. Apple has built a reputation as a company that is obsessed with the experience that its customers have, and Apple's retail stores help reinforce that image. But should they be changed to improve profitability, we would see that as a sign that Apple is drifting away from what Steve Jobs envisioned.

Conclusions

We continue to own shares of Apple, and based on the information available today, believe that Apple's best days are ahead of it. The iPhone 5 will reinforce Apple's lead in the smartphone industry (at least in terms of profitability). The iPad leads the tablet market, with 69.6% market share in Q2 2012, per data from iSuppli. And should Apple launch an Apple TV (or iTV), this will represent an entirely new line of business, one with significant revenue and profit opportunities.

But, investors need to remain vigilant. There is no such thing as a risk-free investment, and while Apple may be an exception to many rules, it is not an exception to that one. The iPhone 5 is likely to be the last Apple product designed and released with input from Steve Jobs, and going forward, Apple's products will be designed and created based on the vision of Tim Cook and his lieutenants. This fact will require Apple investors to scrutinize products much more carefully, for they will need to be examined to see if the company has started sacrificing user experience for the sake of profitability. In addition, investors should be watching for the three warning signs we discussed above.

If Apple starts to alter its attitude towards its investors and its stock, alters Peter Oppenheimer's role as CFO, or clearly shifts its retail focus towards profitability, we believe that investors would be wise to re-evaluate the exposure that they have to Apple. The iPhone 5 will likely usher Apple into the post-Steve Jobs era, and it is a change that investors should be mindful of. Success today does not guarantee success tomorrow, and that is a reality that not even Apple can escape. We would like to reiterate our view that based on the information available today, we see no reason to sell or avoid shares of Apple. But that is no excuse for complacency.

Disclosure: I am long AAPL, MSFT. 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.

Additional disclosure: We hold shares of MSFT via the Fidelity Growth Company Fund

Source: Apple: The iPhone 5 May Mark The End Of The Steve Jobs Era