Apple: Time To Come Out Swinging

Portrait of Steve Jobs (Matt Yohe/Wikimedia Commons)

The dominant picture of Apple in the media today is of a company on the ropes: out of ideas, falling behind the competition, stock price battered, doomed. It’s reached the point where the CEO of BlackBerry, of all people, is criticizing the iPhone as stale.

The reality is a company enjoying record sales and earnings, dominant in its most important markets, with products continuing to be the envy of customers and competitors alike.

How did a company that spent so many years successfully managing and polishing its image reach this point? And how does it change a growing perceptions of failure in the face of actual success? These questions matter because over time, perceptions have a way of infiltrating reality, making the negativity surrounding Apple a long-term threat to the company.

Apple has succeeded by figuring out what consumers want before they knew they wanted it and by making superior products. But a little bit of magic has surrounded Apple products for the past 15 years or so and that helped make iPods and MacBooks and iPhones objects of desire. Today, every major Apple product is the top seller in its category, often by a wide margin. But without the perception of magic, that becomes harder to sustain.

This is where Apple misses Steve Jobs. Today’s Apple is run by a highly competent crew of executives. But Jobs was the magician and no one can replace him. A Tim Cook keynote can be interesting and informative, but it will never be the sort of cosmic event that Jobs presided over two or three times a year. This loss is irreplaceable.

But something else has changed. For the first time in many years, and certainly for the first time since the incredible iPhone run began in 2007, Apple has a competitor that truly matters. When Apple entered the phone market in 2007, it gained about 100% of the mindshare before shipping a product. Once the iPhone was a reality, and especially after the iPhone 3G and the App Store debuted a year later, Apple brushed away the incumbent smartphone makers without them putting up much of a fight.

Samsung is different. The company is nowhere close to Apple’s seamless integration from components to software and the dog’s breakfast that was the Galaxy S 4 launch shows it still has a ways to go in its presentation skills. But it is making first-rate products that are more and more Samsung and less and less Android, and backing them with a lot of money behind an effective marketing campaign. If Samsung ever learns how to overcome Google’s tablet cluelessness, it could be a formidable competitor to the iPad too.[pullquote]If Samsung ever learns how to overcome Google’s tablet cluelessness, it could be a formidable competitor to the iPad too.[/pullquote]

With Samsung on the prowl and Apple, fairly or unfairly, getting beaten up daily by both the tech and financial media, the company can no longer afford its long-time strategy of floating serenely about the noise of the tech and financial worlds. Apple never responded to rumors or much of anything else. Routine inquires to PR staff received polite no comments or, often as not, no response at all. Apple was the honey badger of tech companies. That strategy has served it well for more than a decade, but it clearly is not working very well anymore.

One thing Apple should strongly consider is giving the world some sense of its direction. Rampant speculation about Apple products while Cupertino sat in stony silence used to work in Apple’s favor, but now its being interpreted as having a lack of anything to say. Critics will say Jobs would never have considered even giving hints about products in development, but Jobs was against many things–including Apple making a phone–until he found a good reason to be for them. “What would Steve do?” is not a good guide for Apple today. The company should let the world know that it is still on top of its game.

Apple also needs to throw a bone the the financial markets. With a cash hoard is more than $150 billion and growing, Apple is beginning to look a bit like a bond fund with a consumer electronics company attached. It successfully fought off an effort by investor David Einhorn to give a good chunk of the money back to shareholders, but it has given no indication of what it plans to do, but there’s a good argument to be made that all that cash sitting around is doing investors no good whatever. It could, as Brian S. Hall suggested here the other day, set up an endowment for future product development. More realistically, it could pay a much larger dividend or use the cash to buy back its own stock. It could find something worth acquiring (maybe it’s saving up to buy Samsung, but it needs about another $100 billion.) But one way or another, it owes investors some explanation of its intentions if it hopes to win their confidence back.

There are some signs that Apple understands it is in a new environment. It has come up with a new section of its web site, going after the competition saying: “There’s iPhone. And then there’s everything else.” Marking chief Phil Schiller took on Samsung in an interview on the eve of the Galaxy S 4 launch (though he diluted its impact with an incorrect claim that the phone used a year-old version of Android.) Such steps are a good start, but Apple will have to do more. It’s a difference, and much more competitive world out there.

Further Thoughts on Apple and Investors

In a post this morning, Ben Bajarin speculated on what it is in investors’ thinking about Apple that keeps the stock price relatively depressed. Like Ben, I am not a financial analyst, but I think the mystery is even deeper than he suggests.

Price/earnings ratio chartApple’s stock price has move up smartly in recent months, but it has stayed pretty much in step with earnings–and the remarkable thing is how little investors think $1 of Apple profit is worth. The chart shows the price/earnings ratio–the recent stock price divided by per share earnings over the past 12 months–for Apple and a number of other tech companies. Apple’s PE of 14.2 actually puts it below the average of 15.4 and the median of 14.5 for the S&P 500.

None of the explanations advanced skeptically by Ben can begin to explain this. I think it is inevitable that the meteoric growth that Apple has enjoyed in recent quarters will soon slow if only because it is gradually saturating its markets–and the larger your base is, the harder it is to sustain high growth rates. But there is every reason to believe thatĀ Apple’s growth over any reasonable period in the future will exceed that of IBM, Oracle, or SAP, all of which enjoy higher PE ratios. And it makes no sense that a dollar of Google earnings is worth 24% more than a buck of Apple profit. It all seems a sort of anti-magical thinking.

The fact is that even if Apple falls to earth with slower growth and no new blockbuster products, its stock should reasonably fetch more than it does. But Apple’s PE ratio has been flat for about a year and was falling before that, so this isn’t a prediction that the price will go up anytime soon either.

(Disclosure: I do not directly own any Apple stock, though funds I invest in may.)