At the time of Steve Jobs death, we wondered how the company would survive, finding solace, but not answers, in a rising stock price. We’re back to wondering.
First, let’s go back in time to a different era when the business was fun and huge compensation packages in return for mediocre efforts were the norm; when institutional investors’ commission budgets had a direct correlation to the ability of their sell-side coverage to navigate around a wine list or was dependent upon how many fistfuls of singles they could carry in their briefcases for a night out on the town; and when CEO’s had a period of adulation that extended beyond that of the latest Billboard #1 single. It was the early 1990’s and I was an institutional salesperson at Salomon Brothers. I had joined Sollie after the Treasury bid rigging scandal, figuring that the bar was set so low that it would be difficult to not stand out because, for the most part, the other senior salespeople who didn’t leave for big contracts at other firms were either lazy or smart enough to know that they were held in higher regard by Sollie management than their skill sets would allow at other firms. I, however, was a research salesperson, not a maitre’d, so I only entertained friends, not clients, because I chose to actually make my living through stock picking prowess. And in choosing this path, I loved companies that were dominant and got there through disruptive technology.
But for all the differences between these two eras of then and now (I never thought I would be in the business long enough to reference different eras but that’s a different discussion), there are a number of similarities and the changing of the guard in innovation is one of them. In the eighties Apple, after much fanfare as the innovator of a new technology for personal computing fell on hard times, exacerbated by the departure of Steve Jobs. In the process it became a single digit midget and instituted a dividend, of all things, in the hopes of drawing greater interest to its stock price. Innovation returned with the return of Jobs although it took a while for a new product cycle to revive the company’s prospects and share price.
Fast forward a few years to when Michael Dell was a rock star, having introduced one of the first virtual business models, essentially the front-runner to the way Amazon does business today. I spent some time with Dell and was duly impressed, marveling at how his real time manufacturing and custom build of PCs drove his stock price to a premium versus the other manufacturers such as Compaq, although its multiple never reached the height lofty heights of Apple’s during the last few years. In fact, even with the sell-off in AAPL, it still enjoys a 50% premium to Dell, even with a supposed bid on the table.
Some of these tech companies were so innovative, powerful, and successful that no one envisioned how far they would eventually fall. Remember when IBM was the niftiest of the nifty 50, only to whither on the vine as mainframe growth slowed and Dell commoditized their PC margins during the early ’90’s. Ultimately IBM came back into favor but never achieved haloed valuation status again.
And there’s Yahoo – the former search innovator struggling to survive; AOL, once most dominant, the only people now using their email service are those of such an advanced age that the arthritis in their hands has prevented them from sending emails for the last 10 years. Sony – the Walkman, the first really portable music player; Motorola – the innovator of the RAZR whose dominance commandeered virtually all the selling space for cell phones, its peak price multiples of what the iPhone retails at.
Then there is Eastman Kodak, patents once so dominant and a franchise once so powerful that not only did it have its own pavilion at the World’s Fair but was also the target of anti-trust lawsuits. Now the only ones making money from EK are bankruptcy lawyers. Add Polaroid, Hewlett Packard, Xerox and even GM and Ford.
And, of course, there’s the Blackberry, which enjoyed a far more dominant position in corporate America than the iPhone ever has. Such a ubiquitous device, its addictive powers so strong that the term “Crackberry” was coined and Blackberry etiquette rules for family and businesses came into being. I recall far more late night TV routines on Crackberry addicts than I do on those tethered to an iPhone. RIMM is yet another technology innovator struggling to survive.
Fast forward to the present, back to Apple. It has had a great run as a stock and a company based upon the iPod, the iPhone and iPad. The desktops and laptops are high margin, high cost products that have struggled to gain significant penetration into corporations whereas Apple’s personal devices have been valued as much for their cutting edge technology as their cool factor. All aspects of the company experience are positive – from the stock price to the commercials, to the Steve Jobs impact on tech company CEO sartorial preferences.
Thus the seminal questions: can Apple do what no other company has ever done by continuing to be an innovation leader without ultimately ceding their edge to others? Can it continue to command premium pricing for its products when others are putting forth better technology at lower price points? Has the coolness factor taken too much of a hit, owing to a stock about which cocktail party conversation has become “I sold my stock at $700 and bought FB at $18″ instead of “I bought more AAPL at $600?”
I had an iPad 2 and as I have mentioned before, gave it to my daughter (well, sold it to her but have yet to collect. She’s like the govt., kicking the obligation down the road.) When I went to buy an iPad 3, the salesman told me there was nothing really new. In fact, away from size, the mini has even regressed from a technology perspective. There’s not too much new technology in the iPhone 5 either and the Galaxy is more advanced and cheaper. I actually believe the coolness factor of the iPhone has, until now, driven sales more than innovation and ease of use but as saturation has mitigated the power of first adopters and Apple sycophants run into budget constraints, price is beginning to matter, particularly when functionality is also important.
The telcos have wised up, realizing that they in fact are the true king makers and can drive product acceptance as long as they have something to work with in terms of price and technology. Samsung and Nokia give them that and China mobile gets it, drawing a hard line with Apple.
So where are we? Apple needs a big quarter and great guidance for the next quarter, margins and unit sales never being more important. But mostly, it needs new, truly innovative, technologically advanced products. I don’t know if it is coming or not, but I do see growth slowing and this has resulted in a P/E that has continued to contract away from that of globally branded, high growth companies, to a typical retail or highly cyclical company. At least for now, with AAPL being a show me stock, I’m not sure this is wrong. I am concerned, however, about the possibility of lower price point products because this leads to the oft spoken and seldom effective strategy summarized by “we’ll make it up on volume.” That strategy often leads to slower growth and weaker earnings. Part of the appeal of Apple products has been its exclusivity and a large part of the appeal of its stock has been the fat margins.
Bottom Line: (I know – long overdue): In a rising market, I believe that Apple will be a decent stock. Too much cash to ignore; too much innovation that they can buy. The brand is not damaged in the least, which is a critical consideration. Perhaps still too widely owned, it has been attractive to both value and growth investors for quite some time so I struggle with identifying the marginal or new buyer. I am also worried about the current quarter but perhaps that is discounted in the shares although should it miss 3 quarters in a row investors may wait to get on board. Throughout the entire cycle, Apple has taken advantage of the consumer through premium pricing. Now, as a prospective shareholder, the shoe is on the other foot so I’m looking for a bigger discount to the share price. I do stand willing to pay up if the cool factor comes back – along with new products. In fact, the worst thing that can be said about Apple is that it’s a tech company. Altria, a declining business if there ever was one with no innovation and a paltry growth rate, sells at a significant premium to AAPL owing to a large dividend. It’s a strange world.
Here’s what bestselling author Todd Bucholz has to say about my new novel – UNHEDGED:
“UNHEDGED will take you hostage–sweeping you into a dangerous world where the
quest for big money dominates and good people struggle to escape. You won’t break free until you get to the last page.”