Who wins if Apple’s stock doesn’t skyrocket at earnings?
January 22nd, 2013
Daniel Eran Dilger
After reaching highs above $700 last year, Apple’s stock collectively earned itself bragging rights as being the world’s most valuable public company. But since then, the company’s shares have plummeted in value. Why, and will this change when Apple releases its spectacular earnings tomorrow?
Why did Apple fall so far down?
Pundits have been offering us lots of explanations, the first and most loudly incessant being: Android is taking the world by storm!
After all, everyone knows that once a cheaper copycat comes out, nobody buys the original anymore. This happened to Coca Cola and then Red Bull, Kleenex, every luxury car maker, every fashion designer who was upstaged by the appearance of low cost apparel at WalMart, and really every other global brand that faces any sort of competition from knock-offs of any kind. Like the iPod.
Sorry I’m lying, blame my sarcastic gene. Actually, blame the nut jobs that bang that drum-o’-dumb like its the cleverest observation they can come up with.
It’s been over five years since the iPhone hit the market, and Apple continues to make more than 70% of the
revenues profits (of course, thanks for the correction Russ) of the entire industry. When it appeared, pundits were skeptical of Steve Jobs’ stated goal to achieve 1% of phone sales.
And the truth is that Android (aka “Java on Linux”) has only held onto a fraction of the share of smartphones it once had, and hasn’t done very well turning unit market share into profits. Recall that Nokia, Sony Ericsson and RIM all sold Java on Linux before Google co-opted the platform with its tweaked edition branded “Android.”
Their combined platform was much larger (relative to the market) than Android’s is today, even when you collectively pool all the competitors who have adopted Android into a single block and speak of them as if they are some united force that works together to fight Apple.
Looking at Android as a platform rivaling Apple is as misleading and ignorant as describing the antagonists of World War II as “Europe and Asia” against the US.
On top of that, most of the Android phone makers are actually losing money (except for Samsung, which not only isn’t even exclusively Android but also owes all of its success to mimicking Apple, not to adopting open source software), in a market where making smartphones was once tantamount to growing money on trees.
Java on Linux (Android or otherwise) is not only treading water among all the smartphone makers who themselves are trying to stay afloat, but on top of that, Android has done absolutely nothing to allow hardware makers of all stripes to catch up and surpass Apple in any other product category, from MP3 players (recall the Samsung Galaxy Whatever aka iPod touch killer) to tablets (the Android 3.0 Honeycomb disaster and the Android 4.0 Failure To Turn Things Around) to Apple TV-like devices (Google’s back to back train wrecks of Google TV and the Nexus Q, not to mention the “SmartTV” effort that has gained less traction than the very moribund 3DTV) to game consoles and everything else Android was supposed to power to an Apple-like spectacular success.
So no, Apple isn’t getting anywhere close to being pushed out of its dominating market positions by Android, except in the minds of ideologues who confuse their desires with reality.
Is Apple in trouble simply on its own?
In addition to hammering the Android drum until their fingers have been reduced to bloody stumps, pundits of various stripes have also blamed Apple itself for “failing to innovate” and having “grown boring.”
If I had a nickel for every great thinker who has written online about their great disappointment for being super bummed about no longer being excited about Apple and its new products, I’d almost have enough to buy the tens of millions of dollars worth of Apple stock Al Gore and Bob Iger just accumulated.
Now let me casually ponder aloud if billionaire board members like Gore and Iger like know more about what’s going on at Apple and in technology than the poor schlumps who offer their opinions virtually for free on the Internet. Hmm, think about that and tweet me with any conclusions can you draw on the subject.
The core message of these people who don’t know what’s occurring in technology but write of it as if they do is pretty simple: Apple needs to invent more blockbuster new products just like the iPod and iPhone and iPad, and the company needs to do so every year. Or perhaps every three months.
The problem with this line of reasoning is that, firstly, Apple has enjoyed a pretty blockbuster decade having only invented those three things in the space of ten years. In between, the company has pushed out regular new updates in hardware and software, and branched out with “mini” or other variants that ended up being blockbuster successes of their own, despite “only” being minor derivations of an existing product. And of course, Apple’s other product is now going on 30 years old.
This all happened before
But let’s step back from just talking about Apple. Let’s look at other companies that enjoyed a decade and a half of blockbuster success in the tech industry, say Microsoft and Intel. How many entirely new products did they push out every year to keep in the lead?
Microsoft has had an OS, an Office suite, and Server products. The rest of its portfolio has been a flaming paper bag full of crap. Even so, it remained the most valuable tech company for a very long time, just updating three sets of products that haven’t changed dramatically in character, despite being regularly updated (although on a pace much slower than Apple’s Mac and three primary iOS device families).
Intel has produced one major product line: x86 chips and their supporting silicon. Its efforts to introduce new stuff has been jaw-droppingly tragic, from the DOA iAPX 432 and i960 RISC CPUs of the 1980s to the mega-fiasco of Itanium in the 1990s. Intel even stumbled for a time with x86 (Pentium IV, catching its fall with the Core family)
And despite taking ownership of a major ARM licensee (just before the iOS revolution, unfortunately), Intel actually lost money on ARM (which is sort of like losing money selling smartphones, or drugs) and has subsequently failed to enter the mobile chip market on its own almost as spectacularly as Microsoft has failed in selling mobile operating systems.
The key to maintaining success and averting disaster in the tech industry big leagues is not about pushing out an entirely new product category every year. Apple hasn’t done that (despite the false memory that it has), and neither has any other very successful tech company (or car manufacturer, or soft drink maker, or fashion designer, or any other very successful representative company of any industry).
Really, the only companies desperately pushing out new trial balloons every year are the failures. The Sonys, LGs, the entertainment/mobile wing of Microsoft driven by Bill Gates’ very flawed vision, the version of Samsung before it began ripping off Apple (and to an extent, the current Samsung with its SmartTVs, cameras with an Android back and its refrigerator-toaster phablets sporting a tethered stylus).
And let’s not even bring up Google and its long list of annual launches that almost never survive for more than a year.
It’s not novel for pundits to recommend that Apple do all sorts of things that are actually closely associated with failure when they are actually carried out by others. If pundits knew anything, they’d be running very successful companies themselves, rather than advocating disastrous paths for some of the smartest people on the planet to take.
Being able to invent some reasonable sounding, convincing explanation of what’s happening and where things are going is not a science. It’s the role of religion. Unfortunately, religion has never done much to predict the stock market.
But back to the subject at hand, why is Apple stock down so low?
Some people apparently think that every company’s stock price is set by an omniscient market god who gets up early, reads financial stories and then draws out a stock chart with his all powerful finger. They demonstrate their faith in this occurring by confidently correlating random events with the trajectory of a given stock, with the overall accuracy of a stopped clock.
In reality, stock prices are set pretty much the same way we pick members of Congress and decide how to drive on freeways. That is, by a bunch of people of average intelligence who are often uninformed, distracted by wrecks and swayed by inaccurate reports.
If Apple’s stock price were charted out accurately with the awesome power of hindsight, it would be one beautifully dramatic curve upward. Instead, it looks like a roller coaster, particularly in 2008 when the whole of punditry began to concoct a collective story about how the Weakening Global Macroeconomic Climate would result in people buying cheaper products and less of everything. Sounds very convincing, but in hindsight that simply did not happen to Apple.
Today there are a series of new fallacies to explain why Apple will remain valued far lower than other companies that are far less successful at turning effort into gold. They too will be wrong, just because you can’t be right very often when you spout nonsense.
Who wants Apple stock to rise?
Finally, lets take a look at who benefits by Apple stock rising. In the short term, it is exclusively speculators and their computing systems that hyper-trade based on nanosecond driven algorithms. If Apple’s stock goes up, it will be hit by profit taking that will drive it back down until demand balances out.
Investors who are complaining about “the job” Tim Cook is doing to raise their stock are simply misinformed. It is not Cook’s job to make Apple stock go up, at least not in the short term. Really, he is as powerless as anyone to simply will Apple stock upward.
Even Steve Jobs often remarked about how irrational the market was in the short term. The job of CEOs and everyone else at Apple is to make forward progress in building profitable products. The rest will eventually take care of itself. You can’t argue against revenues and a huge pile of cash forever.
But more immediately, look at the interest Apple has in raising its stock price in the short term. This is in fact, very low.
Sure, everyone at Apple wants the stock to go up incrementally. But in the short term, Apple (and its investors) really benefit from it being stupidly low. That’s because the more obviously, artificially low Apple’s stock price is, the more leverage the company has in recruiting and retaining talent with stock options.
Apple’s new hires, given the choice between being offered options tied to the current market price, and getting options set at the $700-1000 price target set by a wide variety of analysts, will certainly be more impressed with lower priced options.
On top of that, last year Apple announced plans to buy back billions of its own stock. How much do you think Apple wants to buy back? As much as it can! The lower the price, the more affordable it is.
The more stock Apple buys with its own cash, the less outstanding shares there’ll be, and therefore the more valuable investors’ remaining shares will be. And the reason Apple stated for buying back its shares: to offset options and related stock compensation it is giving to new talent or to retain existing people.
Apple is perfectly happy with its stock staying artificially low for now. But if you think that can continue very long, then you haven’t been paying attention to the company’s performance of late. Stop listening to the people who have always been wrong, and start watching what the people with money are doing.
Looking for dark clouds
At the same time, Apple’s leadership doesn’t want investors to panic, sending the stock price too low. Apple’s earnings are going to be blockbuster, but there are a few reasons for pundits to jump all over them in an attempt to portray up as down. This last winter’s quarter is simply a week shorter than the previous year, so that in itself will be used to suggest Apple’s performance is not as impressive as it “should be.”
Analysts will also be looking for details like margins and product mix, telling us that Apple is doomed because it is transitioning from exceptionally profitable devices to cheaper products that make less money. Well, less than before, if you offset the increase in volume. And if you ignore the rest of the market’s inability to make money (or invent successful new products) at all.
Recall that pundits have been telling us nonstop that Apple needs to sell cheaper stuff (first it was Netbooks, then a $1000 tablet, then a cheaper tablet than the Android junk that isn’t selling, then a smaller iPhone mini) while at the same time gnashing their teeth at the scary prospect of Apple earning less per unit, and also gravely concerned about how it will destroy Apple’s premium brand to be found discounted at Wal-Mart. Well which is it, smartypants?
The people who like it both ways are now gearing up to damn Apple whether it does or doesn’t in any number of categories. Hindsight tells us they can safely be ignored. What can’t is how much money Apple has syphoned from China and the rest of the world to become not just insanely valuable but also incredibly powerful.
And for all the pundits who are trying to invent an apocalyptic scenario where Apple gets cloned by a discount producer like Samsung, recall that Apple has taken on this sort of plague before and come out victorious. It left behind Microsoft as dinosaur locked neck-high in non-mobile mud. It dropped Google partnerships that decimated the search giant’s mobile maps market share. What happens to Samsung when it similarly loses its best customer (and those massive sales volumes) as Apple transitions suppliers?
There are lots of scary scenarios for everyone else in the tech industry that you’ll never hear about from the pundits worrying about Apple’s future performance. Tomorrow you’ll likely just get an earful of why Apple “missed” the guesses of at least some analysts and how this suggests great doom for the company that owns the MP3 and tablet “markets” globally, makes nearly all the profits in smartphones, and is the only computer maker to successful weather the Post PC Era storm.
So who wins if Apple’s stock doesn’t skyrocket at earnings? Well, everyone. And nobody. Because it doesn’t matter. Apple controls markets and its competitors are begging for scraps. One can’t inhale +$10 billion a quarter and really be worried about what punditry chats about one’s value. It’s going to be really hard to keep Apple’s market cap artificially low for very long however.
Once Apple’s stock doubles to reach $1000, then we can rationally discuss the potential of it continuing to increase on the merits of new products and spheres of business.