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Full time investor managing my own portfolio.
  • Tim Cook And The Curious Demands Of The Apple Analysts 0 comments
    Aug 28, 2013 12:11 PM | about stocks: AAPL

    For years now I have been reading a few articles on Apple (NASDAQ:AAPL) every day because I own the stock and because I love the company. It's been tough reading for the past year while the spectrum of analysts have been overlooking some fairly obvious truths. Out of frustration I have finally written the article I was waiting to read myself.

    The first thing I would like to address is Apple's perceived lack of innovation under Cook, which seemingly every person with a keyboard feels compelled to write about. I'll break this into two parts (1) innovation to existing products and (2) innovation regarding future products.

    (1) Analysts have been falling over themselves to point out that the IPhone is only receiving 'incremental updates' and this points to Apple's lack of innovation under Cook. Why are people expecting more than incremental updates to an existing product line? Look at the trajectory of the Mac or the IPod both of which were incrementally updated for many years under Jobs with no complaints from any analyst. In fact when looking at Steve Job's past behavior with incremental updates to the IPod (2001-2010), Mac (1998-2010) and IPhone (2007-10) it is illogical to assume that he would have acted markedly different than Cook has. It's therefore very unreasonable to continually lambast Cook for not being innovative like Steve (with regard to incremental updates) when in fact all he has done is keep with Steve's blueprint for the company. Once a major new product category like the IPhone is launched, all that the realistic and sane observer can expect are progressively better updates amidst a few spaced out major innovations.

    Further to this, I would suggest that since the introduction of the smartphone the first major innovation is SIRI (which comes from Apple not Samsung (OTC:SSNLF) or Google (NASDAQ:GOOG)). Now I'm not saying that SIRI is currently great because I don't think it is but as the innovation is tweaked and honed over the next five or ten years it has the potential to be a life changing way of interacting with the world around us that will probably far outlive the IPhone itself. The second major innovation in smartphones will be from Apple again and it will be the upcoming fingerprint sensor. There are half a billion active ITunes accounts linked with credit cards. We have to assume that a fingerprint sensor is one step closer to authorising payments with your phone. The implications are enormous especially since we are already so familiar and comfortable with paying for goods through our ITunes accounts. With cash transactions on the decline relative to card payments, opportunities in this space are massive and transformative. If Apple can make a payment system work effectively, one would theorise that it should be safer and faster using your fingerprint to pay through your phone than by pulling out a card and typing in a pin. I'm sure we would all adore the simplicity of paying in a restaurant with the stamp of a finger. Obviously, as with SIRI, it will take a number of years to develop to it's full potential but it will nonetheless be a major innovation for the smartphone. Also, while the implications are not as reaching, I would hugely welcome being able to log into my trading account and other accounts by fingerprint and not have to juggle with different passwords and code cards.

    (2) As illustrated hounding Cook about lack of innovation for 'incremental updates' is unfounded based on Apple's long prior history with incremental updates. The real question to be answered and the defining moment in his stewardship will come when he introduces a major new product line. Nothing other than a resounding success will be satisfactory.

    However, the fact that analysts were already calling for a major new product line from Cook in 2012 only two years after the IPad was launched is worryingly unrealistic. I don't know how many Disney films those guys have been watching but expecting a new world changing technology from the same company every two years seems like a fantasy to me. Let me remind everyone that there were six years between the IPod and the IPhone and there was no pressure on Job's to come up with something new. Why have Apple analysts been expecting and demanding Cook to innovate at a faster rate than Steve Jobs?

    We have now just passed the three-year mark since Apple launched its last major new product, which was the IPad in 2010. Three years is the very shortest time frame between any two major new Apple releases under Steve Jobs. The main reason for this fast turnaround was that the IPad is essentially a giant IPhone regardless of how disruptive it has proved in the computer industry. That's why it only took three years to develop. Again, demanding Cook to innovate at an even faster rate than Steve Jobs is unreasonable and unrealistic.

    It may appear in this article so far that I am defending Cook and therefore fully believe in his abilities to introduce new product lines. This is not the case. I am simply pointing out that the demands of Apple analysts have not been based in reason. Disruptive technologies take years to develop regardless of who is at the helm. I personally believe that if you dim the noise of the critics he has been satisfactory so far but I don't think we've seen enough to answer the big questions yet. Simply put I don't think he has made any major mistakes or had any major successes yet from which to draw proper conclusions. This will happen one way or the other with the introduction of a major new product.

    From a purely fundamental point of view, the stock would support a significantly higher valuation. However, I do not believe it is trading based on fundamentals at the moment and therein lies the best bear argument for Apple…currently the stock is particularly vulnerable to investor sentiment and the unrealistic expectations of analysts e.g. announcing the second best quarter in American corporate history and the stock price sinking at the news.

    Regardless of this, I feel some sort of bottom has been reached and I think there is almost certainly a minimum of 20% upside in the next ten to twelve months from here (492.08 at time of writing). There are a number of potentially huge catalysts that would move the stock upward. First is the impending deal with China Mobile (and DoCoMo in Japan). Second is the potential for further buybacks and distribution of the massive cash hoard. Third is the announcement of a major new product category. Larger than expected growth in developing countries such as India, Brazil and China with the introduction of the IPhone 5C would help significantly also. The current buyback plan should help to anchor the stock until the catalysts arrive.

    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.

    Themes: long-ideas Stocks: AAPL
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