Daniel Eran Dilger in San Francisco
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Who wins if Apple’s stock doesn’t skyrocket at earnings?

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?
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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.

18 comments

1 Raymond { 01.22.13 at 8:11 pm }

I used to think it was Steve Jobs strategy to stock pile cash all through the 2000′s just to force the stock price higher. Wall Street has always had a hard time understanding Apple’s business.

In terms of press coverage of apple, I sometimes feel like I’ve stepped into a time wrap back to the early 2000s when many people were convinced that apple’s turn around was a passing fad.

2 rabber { 01.22.13 at 8:11 pm }

Daniel – A couple of things I need to comment on. Apple does not have 70% of the revenues – it is 70% of the profits. Small thing, but a big deal.

Secondly, as Apple transitions suppliers away from Samsung, this will have an impact on Samsung’s profits. However, not a huge one. Their semiconductor division is a small, but important part of the company. I would not want to lose the money, but it will not have a serious impact on the company.

Otherwise, good article.

3 DMKraig { 01.22.13 at 9:53 pm }

Two things. First, look at the article on Quartz by Zachary M. Seward here: http://wp.me/p2G6tR-bOb . It shows that this was clearly a use of pundits putting out bad or obsolete information about Apple to make it look bad and drive down the price. The purpose was to force it to $500 or less. It’s called “strike pinning” and it made a lot of money for a lot of option traders.

Second, it reveals that all of the doom-and-gloom pundits are basically nothing more than carnival fortune-tellers…just without the accuracy or the ethics.

4 adobephile { 01.23.13 at 5:25 am }

I don’t know anything about stock trading. I’ve never owned any stock, most likely never will. But if I ever do buy, it’ll be Apple stock. Not for speculation, but for the long haul–for what I believe stocks are meant: investment.

Stock market speculation is gambling, plain and simple. Gambling is a malaise, plain and simple. Las Vegas, Hard Rock Casino, Lottery. People of all walks of life laying down cash–lots of cash–against the prospect of “striking it rich.” Hmph.

Under Steve’s leadership, Apple manages to create some great products which it sells at a good profit and make a ton of money. Does this serve as it should as an example of what others can and should do? Hopefully. But not apparently.

Apparently, all anyone else can manage is to copy, steal, rob Apple stores, and gamble away what money they have on Apple stock.

Sad. Very sad.

What isn’t sad, though is Apple product ownership. We make our living using Apple PRODUCTS, and we’re going to keep buying more in the future.

I’m also excited to hear the news today about Apple’s performance–for the sake of the company, NOT for any possible impact on its stock price.

5 Dmitri { 01.23.13 at 5:32 am }

“Microsoft and Intel. How many entirely new products did they push out every year to keep in the lead?”

I think people don’t ask that because apple is “different.” The thinking is something like this:

1. Intel and MS are “real,” successful businesses. They don’t need hits every year because they “deserve” their success.

2. Apple is a marketing company and its success is a fluke. They don’t “deserve” it. Therefore they need constant world-changing “flukes” to keep the hype up or everyone will notice it’s a house of cards and their business will crater.

Add to that the popular conviction that apple’s successes will always be taken away by cheap windows-like knockoffs, and the need for constant hits becomes even more obvious. To this way of thinking, Apple’s not so much a business as it is the R&D department for the world. And R&D needs to keep coming up with the next thing to survive. Intel and MS, being “real” businesses, don’t have that obligation.

Crazy, I know, but I think this is a popular perception.

6 thyl { 01.23.13 at 8:47 am }

Go up, you damn thing! I need the money. Now.

Other than that, I look forward to real technological progress with MacOS XI. After all, X is now basically reaching its 25th year. I however wonder if Apple will take the risk.

7 stefn { 01.23.13 at 10:05 am }

Apple will never be an Amazon, that veteran Wall Streetwalker that whispers sweet nothings at WS crap tables.

8 gctwnl { 01.23.13 at 11:09 am }

Enjoyed this very much. I like your brand of sarcasm and irony. I had to laugh a couple of times while reading also well thought out stuff.

9 Zarniwoop { 01.23.13 at 6:30 pm }

“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.”

Ummm Macintosh?

[That's probably what pundits have in mind when they say that, but the reality is that the Macintosh was not undersold by Windows PCs until 10 years after it first appeared.

The Mac never took off with wild success, and was always a minority platform dominated by IBM PC sales. Apple's 1980s peak of ~11% market share was largely from Apple II sales. The market for Macs never really shrank, it just didn't grow at the same rate as DOS PCs were. So no, nobody stopped buying Macs because a cheaper product appeared.

If you try to conflate 1990s Mac sales with iOS or iPhone or iPad, things are so different that it's not really a useful comparison, is it? -Dan ]

“And the truth is that Android (aka “Java on Linux”) has only held onto a fraction of the share of smartphones it once had.”

So Android’s marketshare is actually shrinking now? I’m sorry I’m going to need to see something substantial before I swallow that one whole.

[Blackberry was Java on Linux; Symbian's platform was essentially Java, and even WiMo hosted Java as a dev platform. Google bought Android, a Java on Linux platform, and tweaked it into Android. So saying Android is a new platform that is taking over is like saying Chrome is a new platform without acknowledging that it is really a version of WebKit.

Except that WebKit actually has grown in market share significantly thanks to Chrome. Java on mobile has not grown in market share thanks to Android; is now smaller than ever, despite Android, thanks to Apple's displacement of it on around half of all smartphones, thanks to iOS/Cocoa Touch. You can swallow now. - Dan]

I don’t know if Apple needs to come out with a major new product every year. That doesn’t sound like a realistic expectation. But for Apple’s brand to remain strong I think they want to keep from releasing underwhelming product successors.

[Apple's job isn't to 'overwhelm' critics who refuse to acknowledge any aspect of its success. That would be impossible. ]

Now I don’t believe that Apple has much to worry about at the moment if Samsung is their biggest competitor. But things can change quickly. I mean look at RIM and Nokia. For better or worse Apple is in the mobile phone business and could get very shaky at times.

[Looking at RIM and Nokia, I don't see a lot of momentum. What am I missing? In 1995 IBM's OS/2 was more significant than WP8 and BB10. If anything, the distraction that RIM and Nokia's alternative platforms will offer is a plus for Apple, because it creates a balance of power and fragments the "Apple vs every Java on Linux licensee on Earth" nonsense. - Dan ]

10 eyemahsource { 01.24.13 at 2:40 am }

Missed your work a lot since last post. You and Gruber seem to be the only ones I actually look forward to reading. Please post more often.

We have solid evidence here that both Washington and Wall Street are loaded with raving psychotics (criminals) or, to be generous, idiots. I agree with Adobephile stock trading has degenerated to speculation, manipulation or gambling rather than investment based on a discerning long term view of true viability.

11 John E { 01.24.13 at 12:18 pm }

The future of Apple will be decided by the quality of its products and the importance of its innovations (assuming sound everyday management) – NOT by its stock price.

Wall Street devotees like to fancy that “the market” (as if it were a single thing) anticipates the future. but history proves that as often as not, it is behind actual events, or misses reality totally until it is too late.

12 The Mad Hatter { 01.24.13 at 12:45 pm }

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.

The OS, Office Suite, and Server Products are a flaming bag of crap. Over-priced crap too.

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 Intel didn’t even invent their processor line. Datapoint approached TI and Intel with the idea. TI decided not to attempt it, and Intel failed. Yes, failed. They were given a time frame, claimed to be able to meet it, but weren’t able to produce product on-time. Datapoint’s first machines were built using discrete chips.

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.

But Apple did produce a NetBook. One called the iPad. Apple as also been working on reducing prices, and doing a good job (see pricing on the small MacBook Air for one example).

Apple makes mistakes. That’s good. You don’t learn from success. Apple has shown a consistent ability to learn from its mistakes.

So does Google. Google’s biggest strength is the corporate willingness to shove its foot into its mouth up to the hip, and then try something else.

One of Microsoft’s biggest problems is an inability to admit that it’s messed up. Consider Windows 95. Or the Metro interface.

As to stock prices – how many iPad or Mac buyers check Apple’s stock price before making a purchase? Or Microsoft Surface buyers (if there are any)? Or Google Search users?

That tells you how important stock prices are.

Wayne

13 spuy767 { 01.24.13 at 4:38 pm }

Let’s not forget that when Jobs died, he had only 6 or 7 billion dollars in net worth, a right pile of money, to be sure, but most of that was from the sale of Pixar to Disney. Bezos, whose company over its entire life has made less than half of what Apple makes in a quarter, on the other hand is sitting on a pile of ~$23B. One has to think that something is wrong with the stock market for a company’s owner to be worth fives times what his company has ever made. One also has to think that Jobs did what he did because he wanted to bring his vision to life, and not for the money.

14 John E { 01.25.13 at 1:35 am }

another great example of current bizarre market and tech web nonsense is comparing today’s MS quarterly report with yesterday’s Apple report.

Apple reports YOY slight gain in profit on large gain is sales, and the response is: Doom! with 12% one day drop in stock price. Apple P/E now at 10.2. websites foam at the mouth over Apple’s “problems,” never mind its accurately reporting big sales of new products.

MS reports YOY slight dip in profit on slight drop in sales, and the response is: Good! with stock price unchanged. MS P/E now 14.9. websites barf fawning assurances that MS is ok (because it shipped 60 million W8 licenses at launch period 35%-75% off discount prices), never mind refusing to say how many Surface RT’s were sold (a total flop).

so, ok, let’s suppose Apple is no longer a “growth” stock beloved by speculators and is now merely an investment stock like MS has been for some years. so if the MS P/E is an acceptable valuation for an investment stock, then Apple stock should be at $657 today, not $450.

what we have here folks is an outbreak of mass hysteric idiocy. you didn’t know you could catch that shit through the web, did ya?

15 geoffrobinson { 01.25.13 at 11:37 am }

It’s insane.

Apple’s current market value is $423 billion. They have $137 billion in cash. 423-137=$286 billion. Do we really believe the most profitable company on the planet, even not in a growth phase, is only worth that much?

Pretty soon half of it’s value will be cash. It’s P/E, backing out cash, is something like 5. That’s just nuts.

16 bitburn { 01.25.13 at 7:49 pm }

A great piece of writing Daniel :) Entertaining & real.

17 bobgt86 { 01.30.13 at 4:43 am }

Wow Great write-up Daniel! Loved every bit of it!

18 Mike { 01.31.13 at 9:54 pm }

Dan, you are right. Here we go again, like Apple is going to get upstaged by a scrappy Google who is vying to sell products below cost to get some marketshare for Android. Remind me again how this helps them succeed? Maybe they’ll sell a couple million, but that marketshare won’t be much compared to the iPad. Even combined with the original paltry million (being conservative) pre-Nexus devices, how realistic is it for Android to catch up to iOS anytime soon? Not likely. Besides, I don’t think Google really knows what it takes to engineer an operating system… they’re getting better, but it’s still sub-optimal. Though it pleases the enthusiasts, and maybe that’s where Google hopes to influence everyone else through the early adopters/tinkerers of Android.

But this market is really a fraction of a percent of the market, so even though this crowd seems to be 50% of the people buying things, in reality, the number is far far less than Google would like to admit.

Remind me again how many Galaxy S III’s Samsung sells in comparison to the iPhone? That’s right, not even close, unless you bundle in all the other cheap crappy phones that Samsung sells. And now that Apple is switching suppliers, I wonder how long they have before they realize they’re catering to a fraction of a percent of the market who is probably glad to replace their crashy phone that they “tinker” with because they think it’s cool and they think that customization and hacks is good for the platform. Sort of like how people fix old jalopies and try to polish them up so they can look like a real Shelby or something. Never mind that the rest of the world simply buys a Honda or Toyota or BMW and gets on with their life, instead of having to cater to their car customizations.

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