Apple Will Iron out the Wrinkles -- or the Irony

I consider often the work of Peter Drucker, but this recent TechCrunch article re Apple's (AAPL) growth-related woes really has me thinking... and although its author, Michael Arrington, does not come right out and stipulate Apple's recent miscues to be the result of its torrid growth, that is how I perceive the problems he bemoans:

"But recently I’ve had a string of bad apples come my way, so to speak. It’s time for Apple to stop screwing around and start paying attention to product quality. I’ll excuse the one hour of battery life I seem to be able to get out of my iPhone. An arrangement of extra power cords (USB, car, wall) and external batteries gets me through the day. I’ll also excuse the fact that iTunes seems hell bent on not syncing applications from my desktop to my iPhone, and inexplicably removing apps from my phone without any notice. I love that damn phone, and it will take a lot more than lost apps and dropped calls to get it out of my hands. But I don’t have the same blind dedication to other Apple products, and a string of costly problems has left me more than frustrated..."

I recall how Steve Jobs whooped it up 2 1/2 years ago, when Apple shares finally surpassed Dell (DELL) in total market cap. We all could hear his peals of excitement as they ricocheted off the walls of 1 Infinite Loop. Steve, too, had a quest; personal and corporate. So what reminds me of Peter Drucker? Peter would regularly admonish business executives, "Don't fix problems; pursue opportunities!"

Please recall that I am not an Apple computer user yet, so I cannot speak knowledgeably with regard to its products. (Although I love my iPod, and am impatient for my iPhone!) Nonetheless, the company will attend to (iron out) the problems Arrington notes, and will clean up its public relations act with the media and the company's customers.

It is, after all, human to make errors -- we all make errors often (me, all the time!) -- but it is rare to learn from our errors, and rarer yet to learn from our successes. Jobs is feted for his incisive intelligence and imagination -- just about as often as he is noted for his incendiary temper -- but I believe that, when all is said and done, he learns. Jobs and Apple, Inc. will rectify these problems, stat.

Certainly, my intention is not to diminish the importance of these problems, but to note the irony of it all. "All" what, you might wonder? Well, that Apple is approximately midway through its 4th quarter, and will report revenues and earnings numbers on approximately 20 October that, in my informal estimation, will prove leaps and bounds beyond its best quarter ever. This despite the company's claim last month, during its Q3 conference call, that Q4 would show sluggish growth, which caused the stock to embark on a 4 session 'plummet'.

Meanwhile, through it all, Apple shares lurk just beneath their all time high trade of $202.96; to my eyes, it looks increasingly likely the stock will explode into new all time highs soon. The question, then, re the stock is whether new all time highs occur before, or as a result of, the earnings report -- despite (in spite of?) the news that swirls about the company (the problems Arrington articulates), Jobs's health, the parlous state of the global economy, etc...

Stated as a syllogism...
If the company reports the blow-out numbers for Q4, as I expect, and
If the stock does not trade at new all time highs prior to the earnings report,
Then we could expect a large price gap up, subsequent to the earnings report.

Oh, sure, I could be wrong, and the bears correct -- the stock could instead decline $10, $20, or $30 -- but that possibility looks increasingly remote. Which qualifies as the irony of all ironies.

Full Disclosure: Long the shares of Apple

Comments

[daniel murray:]

I think you are correct about 4th FQ earnings. Will be an early Xmas for AAPL holders.

2008 Aug 24 08:01 AM

[LiquidSoapD...:]

All I know of Michael Arrington is what you write, but does he really fault a company because of problems he is having with one product? That's not much of a sample size. What if Apple makes only 1% lemons and he happens to have one? What if some software he loaded is causing the problem? I'm just saying, hope his criticism of Apple's quality is based on something more than problems with his one iPhone.

2008 Aug 24 10:10 AM

[mollytjm:]

it's BECAUSE apple fixes the problems that they constantly score very high approval ratings from customers. when compared to anyone else...they're better. this does not mean they're perfect. but they're fast learners and great innovators. they'll still be doing well when all Dell has going for it is a color.
i hear microsoft hired jerry seinfeld to do it's ads... i guess you need a sense of humor if you're going to use Vista.
apple is a good long term buy and i hold stock in it.

2008 Aug 24 10:47 AM

[mollytjm:]

p.s. um...you love your ipod and can't wait for the iphone but don't have a mac? humble suggestion...try one. you'll save a lot of valuable time whenever you have to use a computer... and you can save $ on virus protection too...you won't need it.

2008 Aug 24 10:49 AM

[AdamC:]

Bad news sell, that's why Arrington write this kind of stuff.

2008 Aug 24 10:54 AM

[Thomcarl:]

I have to agree with the article, I currently have 4 Macs in the house 1999 G3 Blue & White, 2001 QuickSilver, 2003 G3 iBook, 2007 Aluminum iMac. All are trouble free and have never had a problem with the exception of the iMac which is back in the shop under warranty for the second time. The first time Apple replaced the logic board and the hard drive, the second time the superdrive has crapped out and has been sitting on the bench at the service center for 10 days waiting for a tech. to assigned to it. I really do like my iMac but I'll never buy another one. Since I worked for Apple as a service tech. for 3 years (retired now) I know that the current state of Apples quality problems is new, and a problem that Apple needs to address and quickly. Its a lot harder to climb out of a hole than fall into one. I have written to apple twice (no reply), and talked to a customer service rep. a week ago. The service rep. suggested and extended warranty plan, which is not acceptable to me, as I can see no good reason to spend anymore money on a lemon. He told me if I have any more problems with the system after its out of warranty to contact customer service again and they will work out a plan to replace the system since it has a history of failures.

2008 Aug 24 02:52 PM

[mollytjm:]

to tomcari: we've had lots of apple computers since 1983, but our son had an imac that was a lemon. he called main headquarters in california and complained, outlining the constant problems. even though his was 2 years old, they sent him a brand new one (with updated everything) and a full 3 year warrenty, free. it works perfectly. he didn't wait until it was out of warrenty, so i woudln't give up on getting a new one right away. when you call, you usually get someone different. it's worth a try.

2008 Aug 24 04:52 PM

[neutrino23:]

It is unfortunate that people who have had problems with one machine extrapolate that experience to the entire output of the manufacturer. A little more intelligence should be applied to try to assess the magnitude of the problem. I've used Apple computers for a long time. I've experienced a few problems but they've always been fixed quickly.

If one person has a problem with a Lexus does that imply that Toyota has suddenly lost control of product quality? On the other hand, if we start seeing massive recalls then we'd start to worry about Toyota.

I think Apple itself will do fantastically well. Talk about hitting on all cylinders! No debt. Huge cash reserves. No legacy technology. New products are well accepted. Computer business is growing. New businesses (iPhone, Apps Store) doing well. New products in the pipeline. Why Wall Street doesn't like them better I don't understand. It may be that they don't understand this business. A friend told me of his uncle who was on Wall Street. He talked excitedly about Cisco Systems for a while and what a great stock it was. Then he asked my friend "Say. You live in Silicon Valley. Exactly what does Cisco Systems do?"

I have the feeling that in a year or two we'll see something really interesting come out of Apple. I'm not sure what. They are so smart and so organized and disciplined and so clued in to the market I feel like the widgets they are making now are a prelude to something grander. Now everyone is focussed on the iPhone as smart phone but it could be part of the ground work for some new business.

2008 Aug 24 07:31 PM

[Doug, Mtn. ...:]

You are correct in that Apple is quite nimble on its feet and DOES fix its software woes rapidly. Let's look at OSX 10.5 (Leopard). It was introduced 10 months ago in October, and had many problems in the beginning. Many customers couldn't even install it. But already we have had 5 updates to it (versions 0 through 4), and it's turned into one fine, stable OS. It takes a while to shake out most of the bugs, but Apple does it. Rapidly, IMO. Vista has been out 19 months (?) and we've had but one Service Pack.

The phone is another example of fast response. Jobs is absolutely driven and will not accept anything less than full quality and functionality. I'll wager that inside Cupertino headquarters, there are war rooms set up all around his office to address all of the iPhone issues. Not because he HAS to fix problems, but because he WANTS to fix the problems. "In Steve I trust."

Compare and contrast this to Microsoft. They (MSFT) have now launched a new $300 million campaign to promote Vista. Rather than correct their many problems, their response is to try to convince you that the problems their customers have encountered are all in their heads, that the software is just fine as is. Ballmer calls this "fighting back." Ha! Steve Jobs recognizes when his products are less than ideal, admits it, and corrects it (MobileMe, for instance, is a work in progress). My prediction is that in 6 months time, all of this 3G phone and MobileMe trouble will be ancient history and long forgotten.

If Apple is guilty of any sin, it's probably that they are under too much pressure to release a product too soon. Part of that is Jobs' responsibility (schedules are schedules) while the rest of it is public pressure. Let's not forget who was clamoring the loudest for 3G iPhones only 3 months ago despite Jobs' admonition at the 2G introduction that 3G phones are power hogs.

I'll trust Apple any day over Microsoft.

2008 Aug 25 02:07 AM

[Constable Odo:]

Yeh, Apple stock could explode or it could decline. That's the way to play it safe. All indications are that Apple should post some good numbers this quarter, so I'm really curious if the stock will finally get back to where it was at the end of last year.

I'm getting tired of hearing some analysts talk about Apple hitting $300 and meanwhile the stock doesn't move more than a couple of bucks a day in either direction. It doesn't seem like much of a trend for a stock that's ready to break out anytime soon.

I see there are analysts setting price targets for RIM from around $160 to as high as $225 a share. And this for a stock that Apple seers say will be back to $100 a share by the end of the year. I sure don't know who to believe anymore. I'm starting to think everyone is just blowing hot air and just guessing to suit their own desires.

2008 Aug 25 09:29 AM

[David M. Go...:]

Wow, these are all great comments. Thank you, All!

In reply to Constable Odo, I add the following remarks:
Stocks build three readily discernible trends in all periodicities -- up, down, and sideways. (So tell me something I don't know, David!) When a stock trades sideways for ~9 months, as is the situation for Apple/AAPL, there usually is a good reason for it.

1) You could view the chart's technicals and claim there is a real war of wills between the bulls and bears. Which the bulls appear to be winning. Why? Because the lows are increasingly higher, and the highs kindasorta flattish. Consider the chart either as a symmetrical or ascending triangle. The breakout from both patterns, in either direction, historically proves powerful. Both patterns, though, typically prove to be a continuation pattern of the previous trend.

Or

2) The previous up trend was sufficiently powerful that the "P" grew to fast, and far in advance of the "E". So the stock hesitates, while the "E" catches up to the "P". Sometimes "P" declines, sometimes "T" (time) elapses, but the net effect is a much smaller PE Ratio.

And then after sufficient time and a low enough PE AND if the earnings continue to grow, and faster than Wall Street analysts guess, then the stock can resume its former upward march. Your typical growth stock story.

The analysis of stocks' trends is the province of chart reading, which is a subset of technical analysis. Combine a solid fundamental story with tremendously bullish technicals, and sail with the wind at your back.

My comments here are obvious truisms, I know (and I certainly to not mean to offend you), but as with everything, consistently successful results from investing is more difficult in practice than in abstract.

But that is what makes investing so much fun, as well as profitable!

2008 Aug 25 12:42 PM