Apple Takes a Beating — What Did You Expect?

Apple (AAPL) has had a beating both in the market and the press lately.  Despite record quarterly profit, they lost their number-one stock spot to Exxon Mobil. By some  prognostications, Samsung is rising in the smartphone market—evinced by an impressive 76% YOY fourth quarter profit increase—and Huawei is taking a stronger foothold on the price-sensitive emerging-market field, while Apple is stumbling in the smartphone and tablet computing markets.  Further downward movements in Apple’s stock prices may well be on the way.  Well, for those who failed to sell Apple at above $700 prices in September 2012 and now see it below $450 in January 2013, what did you expect?

Consider Apple’s history leading up to its high-flying valuation.  Steve Jobs at Apple had a track record of being an innovation genius that revolutionized industries and created entirely new markets by improving the human-technology interface.  His insight and competitive instinct led Apple to invent the desktop computing world we live in, portable MP3 players we can actually use, usable smartphones that surf the net while we are on the go, and most recently the tablet computing market.  These innovations led Apple to have the highest market capitalization of any company in 2012.

But each of these innovations was quickly copied, and the extremely high profits they created were quickly returned to those similar to other intellectual property driven firms.  For instance, consider the iPad.  In 2010, the iPad redefined the e-reader / netbook market and created a tablet computing market.  By 2011, Samsung Galaxy had been released with the Google Android operating system.  By 2012, Microsoft released its own Surface into a well-defined tablet computing market. That is just 2 years from “completely revolutionary and new” to “competitive market with evolutionary improvements.”

Apple has never proven itself as a strong competitor in the “evolutionary improvement” market environment.  In many ways, to be competitive in that environment goes against the vary grain of what made Apple Apple.

• To compete with revolutions, Apple relied on vision and required beauty and simplicity.  This led Apple to create markets with a single product that became the standard defining what a product in that market is.  It leverages a culture of perfection.  It values beautiful and elegant solutions.  It pushes entire teams to question their definition of what perfection is, and tear-up entire paradigms in order to achieve a new possibility of what the human experience can be.
• To compete in evolutionary markets, a firm has to embrace complexity associated with increasing market segments, juggling multi-product / multi-brand market strategies, at prices that overlap between products in relatively similar benefit positions.  It looks for marginal improvements upon the status quo released quickly and iteratively.  Covering all market needs within a product category becomes the focus – and three iPhone flavors with varying capacity don’t come close to doing this.

The firm built to compete on revolutions isn’t the firm built to compete in mature or maturing markets.  They are two different cultures, with two different operating and command styles, and two very different outcomes.  To make the switch between revolutions and evolutions, the firm will have had to change its culture, routines, and organizational structure.  I have not heard anything from Tim Cook to suggest that was his strategy.

So if you bought Apple stock under the assumption that they would “mint money” off their existing product lines through evolutionary improvements, your expectations were strategically wrong.

Similarly, if you valued Apple stock under the assumption that Tim Cook would reengineer Apple towards evolutionary product improvements for maturing markets, your expectations were strategically wrong.

But if you value Apple stock under the assumption that they may be about to create another revolution, then at least the current news isn’t bringing you evidence that your expectations were wrong.  Still, you should be demanding Tim Cook to bring that revolution to market soon.  Patience is a valuable characteristic for a stock holder.  But stockholders don’t pay Tim Cook for their patience.

Note of Interest and Holdings: At the time of writing, the author is not currently a direct consultant to nor investor in any of the firms listed in this article.