Tim Cook And Apple: What About The Future?

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About: Apple Inc. (AAPL)
by: John M. Mason
Summary

With all the news about Apple's sales slowing down, it is expected that analysts look closer at where CEO Tim Cook is and how this might affect his legacy.

Mr. Cook is highly respected, has had a sterling career and has overseen Apple continue to produce returns on shareholders' equity in the mid-thirties or higher.

With Mr. Cook's track record, with a vibrant R&D program, with an exceptional hiring record, Apple's performance will not drop off, even though its glitter might decline some.

Recent disclosures by Apple Inc. (NASDAQ:AAPL) have raised concerns about Apple's future and what, if anything, Apple has coming to the world in the near future.

Following on the plethora of early articles that mainly covered the company, several new articles came out over the weekend that addressed Tim Cook, Apple’s CEO since August 24, 2011. Substantial articles occurred in the New York Times and in the Financial Times.

The headline in the New York Times article read, “5 Reasons You Wouldn’t Want to Be in Time Cook’s Shoes Right Now.” Rather ominous.

The Financial Times article had its twist with the heading reading, “’Defining moment’ for Tim Cook as Apple looks beyond the iPhone.

Tim Cook better look out.

The major issue seems to be that the presence of the iPhone is waning, which leads to the question, “What is going to follow the iPhone?”

Let me just start by saying that Mr. Cook is in his eighth year as the CEO of Apple Inc. This is long enough to attribute some of the company’s current performance to Mr. Cook and not assign all the success of the company to his predecessor, Steve Jobs.

Since 2011, Apple has turned in a return on shareholders’ equity that has constantly been in excess of 30 percent. Economists contend that a company has a sustainable competitive advantage if it can maintain a 15 percent return on shareholders' equity of 15 percent.

During this time Apple’s highest return on shareholders' equity was, rounded off, 45 percent in 2015. In 2018, some analysts placed Apple’s expected return to be around 38 percent.

Creating and sustaining these kinds of performances year-after-year-after-year are exceptional.

Mr. Cook came to Apple Inc. in 1998 as a Senior Vice President for Worldwide Operations, and then served as the Executive Vice President for Worldwide Sales and Operations.

The New York Times article cited above makes the claim that “Apple’s sophisticated supply chain is among the wonders of modern business, incorporating hundreds of suppliers in a complex web of factories and shippers to keep up with global demand for one of history’s most popular products.”

“And, Mr. Cook, who was Apple’s operations guru before he became chief executive, is largely credited with its creation.”

The New York Times also goes ahead and states that Mr. Cook “is regarded as one of business’s best bosses….”

The point is, if the iPhone does not continue to generate the past performance, what is to come next?

For example, people are not moving on to the new iPhones as fast as they used to. They are sticking with their old ones.

But, Mr. Cook is optimistic. “We are confident and excited about our pipeline of future products and services. Apple innovates like no other company on earth, and we are not taking our foot off the gas.”

To back this up, Apple’s R&D budget continued to explode last year, climbing 23 percent year on year to $14.2 billion, more than twice what it spent in 2014.

From regulatory documents, we learn that Apple had 17,787 employees in late 2006. According to the Financial Times article, Apple’s headcount now stands at 132,000 - doubling even since 2012.

Apple also has “dry ammunition” to continue to support this kind of R&D effort and manufacturing expansion as its cash balances total around $130 billion.

But, no one sees another remarkable wave of innovations that would challenge the success of the iPhone. And that is concerning to some.

Furthermore, however, there are some clouds on the future.

The two most prominent are as follows.

First, according to the New York Times article, the first concern is that Mr. Cook’s China bet may backfire. Mr. Cook had cracked China’s market. Competition is fierce and Raymond Zhong, in the New York Times, brings us up to date with how competition is evolving there.

Second, there is the possible conflict between President Trump and Apple where Mr. Trump would like to see Apple Inc. do more of its production in the United States and not in China.

But, also there is the general feeling that innovation can only be maintained at such a high level for so long. And, not all of a technology era can operate at the level that Apple has been functioning at. As I have written elsewhere, the digital era has only existed for 35 years or so. As such, it is estimated that the era still has 35 or 40 years remaining before it runs out.

But, all the innovation takes place in a massive wave that dominates the scene.

I’m not saying that Mr. Cook and Apple might face a period of time in which it duplicates the “glow” of the past.

The question seems to be, will Apple retain its luster or will it become just another ordinary technology company.

The Financial Times article concludes that many still see the potential for another comeback.

“If ever there was a team that could deal with these issues and go forward I think it’s the team that is in place.”

With Mr. Cook leading the way. And, what is wrong with a return on shareholders' equity of 30 percent or more?

Nothing I can see!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.