Apple (AAPL): Still Calm Before The Storm
The trodden path of corporate highways is laden with corpses of corporations that grew to relevance and forgot to stick with the formula that brought them success. Success creates the luxury of choice, and choice creates the burden of opportunity cost. When companies choose to be correct with every decision, caution becomes the blade that cuts them a thousand times to their death. Apple is not unlike other corporations except that, as usual, we prefer to think that history is a thing of the past as opposed to today's events told tomorrow.
The tenacity and single-mindedness of Apple's erstwhile guru, Steve Jobs, captured in a few quotes demonstrates the ethos upon which Apple rose to prominence. He said "A lot of times, people don't know what they want until you show it to them". He also said, "Our goal is to make the best devices in the world, not to be the biggest". Apple was not always first with a product segment but it made the best designed, engineered and user friendly alternative. Blend this with the mystique and frenzied expectation of "what's next" and you get the recipe of the sensationalism the brand developed. You also get the sentimentalism which is tied to the brand and stock price.
Sentimentalism around Apple stock:
Nothing is quite as orgasmic to "Appleheads" like the release events of new products/software updates. Look at the chart below to see how product launches have lifted the stock price. Also notice that despite constraint periods after each launch the stock price continued to rise.
- Cumulative Effect of Product Launches:
(Chart pulled from valuewalk.com article by Jacob Wolinsky)
The last time Apple prices dipped down to the $590 range was in July of 2012. The chart does not show the launch of the iPad mini which to me is more of a chink in the Apple armor than anything else we have heard about. If you put into context previous statements from Steve Jobs about the iPad being the perfect size and the quality of current similarly sized products in the market place, it smells to me as a defensive move which is not what Apple is about. Initial market reaction has been tepid for Apple's standards and enough for the fickle followers to get worried.
- Margin guidelines (10/26) and organizational restructure (10/29):
The chart below shows market reaction to issued margin guidance and organizational restructuring.
(Source of chart: Yahoo Finance)
Margin guidance and re-org
The activity from Friday Oct 26 to Wednesday Oct 31 on the chart above reflects, in my opinion, not only the dip but also how closely watched the stock and company is. Note that the full effect of the leadership change was possibly inadequately reflected in the price due to market closures after hurricane Sandy. How else can you explain such overreaction for a stock that is 68% owned by institutions other than fickle sentiments? A few more hiccups and it will be interesting to see where the market goes with the stock.
- Analyst downgrades
Analyst reviews are continuous but revisions after current news would obviously be premature. The audacity of a review, however, will no longer be questioned and any adjustments will play in to sentimentalism reflected in the price changes above. Former downgrades by BTIC Research and JMP Securities all of sudden might seem prescient, especially with cracks starting to show in the Apple fortress. If Apple were to meet or miss sales/margin estimates, expect to see a flurry of "me first" analyst reviews. Remember the minimum expectation is for Apple to exceed guidance on all fronts.
"Did you know that Apple spends far less on R&D than any of its rivals - a paltry 2% of revenues, versus 14% for Google (GOOG) and Microsoft (MSFT)?" - Dan Lyons BBC blog. A better metric is obviously the conversion ratio of R&D to products. Previously, Apple could take time to polish up its R&D before delivery to the market. That is no longer the case as product cycles are getting shorter and ecosystems are developing around multiple products. They are no longer the underdog and the market expects them to churn out hits every cycle. The aforementioned Dan Lyons cogently lays out how much Apple has failed to innovate. He says "six years ago the iPhone was like a sexy new flagship model from BMW or Porsche. Today it's a Toyota Camry. Safe, reliable, and boring. The car your mom drives. The car that's so popular that its maker doesn't dare mess with the formula". I have to say I agree with him at least on the iPhone.
I understand that innovation does not equate to revolution. But, I also don't think Siri, retina display, redesigned headsets, larger phone screens, and proprietary maps are innovative enough in the current market place. Not when competition is tossing fastballs and gaining credibility and recognition from Apple in courthouses around the world. There are some signs that cannot be ignored, Android is growing faster than iOS in the mobile phone space and Samsung S3 outsold the iPhone 4S in the U.S. Windows 8 (Mobile and PC) will make progress in market share and with vendor partners in both phones and tablets.
Lethargy sets in when companies mature and status quo is not as undesirable as it previously was. Leadership onions need to be the size of watermelons (shout out to Tony Kornheiser) because every decision is magnified and scrutinized. Here are some maturity signs for Apple:
- Leadership entrenchment and creation of little fiefdoms
- Supply chain constraints and over reliance on key vendors
- Incremental innovation as opposed to total redesigns
- Huge cash stockpiles
I am a huge fan of Apple products and their ability to de-clutter technology for everyday use. Court battles, cost cutting, strong-handed negotiations with carriers are not their essence and to me are signs that they are starting to pay too much attention to the objects in their rearview mirror. Apple has quietly transitioned from high end to low cost leaders and created supply chain bottlenecks that are impeding other OEM's from competing on price. This has to be admired whether you like them or not.
Conversely, lightening can only strike so many times. The fact that Apple has been able to launch consecutive successful products is atypical. They have stormed out of the gates and created unprecedented value for their stockholders. Now is the time to collect some profits and reposition. One of its competitors is due for a hit and the frantic pace of change might just mean that Apple will have to play catch up again in the near future. The pace at which Apple has traditionally turned out products is not fast enough and the release of the iPad Mini might be acceptance of the fact that it will need to go 80/20 - get 80% of revenue from 20% of its customers. I bow out with another Steve Jobs quote "Every once in a while a revolutionary product comes along that changes everything. One is very fortunate if you get to work on just one of these in your career". Apple's been very fortunate but the iPhone 6 and/or Apple TV is not the trick that will keep it at a $1000.00 if it ever gets there.
Disclosure: I am long MSFT.