Apple’s Stock Price Is Crashing And There’s No Bottom In Sight
techcrunch.com
techcrunch.com
I keep meaning to write a blog entry on this. To understand my reasoning it helps to be familiar with The Innovator's Dilemma (see http://www.amazon.com/The-Innovators-Dilemma-Technologies-Ca... for the book). The basic assumption of that book (backed up with many examples in industries from ship technology to hard drives to backhoes) is that any technology that has a well-established value proposition will tend to show exponential improvement on that value proposition over time. Users needs also follow an exponential curve, but it tends to be slower than the technology improvement curve. (A lot slower.) Therefore if you have 2 technologies competing for that market, eventually the cheap crappy one will be good enough, and after that point hits it wins. The premium technology will always show great revenue curves even once their low-end users start switching, but those curves hide a great oncoming disaster.
In every market that Apple is in, it is the premium product. It has competitors. And its competitors have a pretty good sense of the value proposition that they need to deliver. Therefore every market line for Apple is doomed. They show no signs of having new ones to wow us with, so Apple has a world of hurt coming.
But, you may ask, why did they not have this problem historically? My answer is because Steve Jobs' genius lay in constantly finding and delivering new value propositions. He found and defined markets for pretty computers, light laptops, smartphones, and so on. The whole Innovator's Dilemma argument depends on competing on a known value proposition, and Jobs never sat still long enough for his competitors to do that.
Of course Jobs is now gone, and there is no sign that Apple has anyone who has that talent.
http://blogs.reuters.com/great-debate/2011/08/29/jobs-made-a...
It's true that Apple has occasionally pioneered entire new markets, but it's also done pretty well with many of its existing markets.
However I think that he missed a bigger point. His theory is based on companies competing on a clear value proposition. But I cannot think of a single product where Apple under Jobs ever tried to compete on the same value proposition that its competitors were using. For instance consider the iMac. In theory it was a desktop computer, competing against a plethora of others. However it was the ONLY desktop computer that came in your choice of pretty colors. Competitors laughed, but people bought them.
The Macbook had a very different look, but again was distinguished from competitors by its appearance. (The specs were similar to worse than direct competitors, the price was higher.)
The iPod entered a market with established competitors, but was differentiated by its extreme design simplicity.
The Macbook Air changed things up in a different way. You had another laptop, which was severely underpowered, left out expected features (like a DVD player), but offered extreme lightness before anyone else did.
Whether we're talking about Apple's new product lines, or product lines that were in existing markets, there seems to always have been some unique value proposition which Apple offered that its competitors did not. I think that this fact is integral to its success.
No, the big difference is that Apple often succeeds when they try ambitious new designs, whereas Sony and HP and Microsoft usually fail when they try to do the same thing.
I've always thought there was a large amount of self-fulfilling prophesy involved in this. Apple, like Tinkerbell, works primarily because we believe in it. If we stopped expecting it to succeed, it would stop succeeding.
Suppose HP releases a product that seems really cool and potentially useful but has a few annoying flaws - the software doesn't work quite right. Few buy it, HP never fixes any of the flaws, HP discontinues production, and you find the abandoned product on the discount shelf at Fry's.
Now suppose Apple does the same thing. Because it's Apple we know they're committed to fixing the initial obvious flaws. Developers and users see the potential in the new product, not just what it is but what it could be. People buy it. A rash of "early adopters" buy it practically sight unseen and then whine in blogs/newspapers/magazines about what Apple needs to do next to make it perfect. Apple takes the revenue they get from those early sales, considers the suggestions, and fixes the problems. The original buyers get a software patch; new buyers get version 2.0 that fixes the original problems and more.
The first iPhone didn't have copy-paste and didn't allow third-party apps and didn't have an "app store". People bought it, and within a year or so it did have those features. Apple has a track record of sticking with it and improving their crazy stuff, so we trust them to fix problems, so they find it worthwhile to take bigger risks.
[Minor nit: The first iMac only came in Bondi Blue. The choice of colors period came later, when it was already a hit.]
Of course you won't see the type of returns APPL stock owners saw in that same period, but you really can't predict that sort of thing without inviting huge risk. Betting on individual companies because you think you know if they are going to win or lose is a solid recipe for failure as an investor.
But would it have been a good investment? According to http://beta.fool.com/stockdissector/2012/10/03/dividends-cou... if over a decade you took everything you got from Microsoft, and reinvested it for maximum returns, your annualized interest rate is 6.35%. That is the most favorable possible view of Microsoft's performance. Let's compare to other big tech companies. I'll ignore dividends for the others because I am lazy and don't need it to make my point.
Yahoo! (which is widely regarded as a company that has been doing poorly overall) went from $8.73 to $18.89, which is an annualized return of 7.4%.
IBM went from $75.45 to $185.85, which is an annualized return of 9.4%.
Oracle went from $10.39 to $29.95, which is an annualized return of 11.2%.
SAP went from $18.75 to $71.04, which is an annualized return of 14.2%.
Red Hat went from $4.52 to $47.73, which is an annualized return of 26.6%.
And for the most extreme example, Apple went from $7.90 to $525.62, which is an annualized return of 52.6%.
If you wanted to invest in a major company with a significant software presence a decade ago, it looks like Microsoft was a fairly bad choice. I believe that it will continue to be one over the next decade.
The fix for this would have been new products by Apple and that's what Mr Market has been expecting for long time. But instead we have only seen new minor versions of same old. The reason Apple's stock has been able to climb at accelerated pace so far was continuous stream of new products every 3 years and that seems to be gone now. Perhaps that might be the reason for Apple's new employee initiative of 20% time?
Sometimes things aren't as simple as "STEVE JOBS IS DEAD," a new Nexus handset or more lawsuits with Samsung. Sometimes it's just the market overall. Even earlier in the year I noticed it with the Greek bailout issues. Apple stock had been falling for weeks, then suddenly the pro-austerity party in Greece won the election, and stock prices started shooting up again as concerns over Europe collapsing were alleviated.
Nobody cares what I think, but I'm going to go ahead and predict that Apple's descent will be dramatic and historical. Apple is shellshocked with Steve's passing and is completely directionless.
Apple was Steve, Steve was Apple. One cannot exist without the other.