Tim Cook’s interview on CNBC last night highlighted the huge gulf between his optimistic view of Apple’s future prospects, and the pessimistic one being expressed in both Wall Street commentary and the share price.
The share price speaks for itself. As Business Insider notes, the stock has dropped 11% since Apple announced its first-quarter earnings, and 27% over the past year. Even billionaire investor Carl Icahn – who once couldn’t stop talking about how under-valued AAPL was – sold 7M shares back in February and has now dumped the stock altogether. Not the greatest expression of confidence in the company’s future.
Analysts have been queuing up to pronounce that Apple is doomed, the iPhone is on a slide, it’s all over. Tim Cook, meanwhile, claims that Wall Street is guilty of ‘hugely over-reacting’ to a short-term glitch …
I’ve written at length before about the ‘peak iPhone’ phenomenon. I outlined there the specific reasons we shouldn’t read too much into the previous quarter’s results, while at the same time arguing that Apple is not immune to market forces and would have to bring iPhone pricing more into line with the competition – which was exactly what the company did with the launch of the iPhone SE. The company went one better, in fact, pretty much squeezing a flagship phone into a classic casing (much to the delight of both Zac and myself).
Since then, of course, we’ve seen another quarterly fall in sales – albeit one in line with Apple’s guidance. But Cook had a lengthy list of reasons to be optimistic about the company’s future. The points he squeezed into a relatively short interview were these:
- Apple still outperforms every other company out there
- Pent-up demand for larger-screened phones was bound to see a fall-off afterwards
- The Chinese economy is tough, but there’s still lots more growth to come there
- And the iPhone SE is doing well in China (no figures specified)
- And India will also become a huge market over time
- Android switching is very high
- Customer satisfaction and loyalty among existing owners are also very high
- Services are now Apple’s second-largest segment, and are growing rapidly
- The Apple Watch still has lots of potential
- New iPhones will show you features that you won’t be able to live without
- There’s plenty more innovation on the way
That’s a lot of bullet-points. But there are three problems with the list in the eyes of investors. First, it’s Cook’s job to talk up the company’s prospects, so it’s not news to them when he does just that. Second, they’ve heard it all before: these are all pretty generic arguments in Apple’s favor, and ones Cook has voiced on previous occasions. Third, Cook refused to be drawn on when things might turn around.
Asked whether the final fiscal quarter of the year might be the point at which growth resumes, his response was non-committal.
I’m not projecting quarter by quarter. But what I can tell you is, backing up and looking at the larger picture, we’re in great markets. We have huge opportunities geographically. We’ve got great innovations in the pipeline. People love our products, they love using our services. All of this to me equals great opportunity.
After-hours trading suggests investors weren’t impressed, the stock price barely moving.
But this is, in my view, the heart of the disconnect between the two viewpoints. Wall Street is interested primarily in the short-term, and is focused on the difference between expectation and performance, rather than performance per se. Apple is in it for the long haul, and is focused on delivering what its own guidance promises, not on what external analysts and investors might have predicted.
Cook’s arguments aren’t new, so Wall Street shrugs and takes the view that these points are already factored-in to the share price. But the fact that the arguments aren’t new doesn’t mean they aren’t valid. They are all good arguments, and from Apple’s perspective, the important thing is not the precise quarter in which the business returns to growth, rather the fact that it is taking the actions now that will bring about that result at some point down the line.
And there is an obvious second factor at play: Cook has peeked beneath those black cloths. He knows what Apple has planned in terms of future products and pricing; Wall Street doesn’t.
There’s an equally obvious counter-argument, of course. As I said earlier, it’s Cook’s job to talk things up, and Apple has a lot of form for trying to keep Steve’s reality distortion field running, presenting rather ordinary things as if they were the most awe-inspiring inventions in the history of the planet. So just because Cook says Apple is working on a new iPhone with features we won’t want to live without doesn’t make it so. (Don’t get me started on a keynote that presented a bunch of watch bands as if they were deserving of awe.)
But while even Steve’s Apple never was a place where there were innovations every year (iPod 2001, iPhone 2007 and iPad 2010), the company does know that it has to pull a rabbit out of the hat every now and again – and it is for sure working on that. Whether it’s an Apple Car or something else entirely, there will be new product categories from time to time, and those will – given Apple’s history – be big.
Some may object that the most recent new product category, the Apple Watch, isn’t yet big. But neither was the iPod when it first launched. Some things take time to build, and my own journey from skeptic to addict has persuaded me that there is plenty of slow-burn potential left in the Watch as functionality ramps up.
Cook’s arguments about the future potential of existing product categories in China and India are equally valid. Apple will, as I argued before, be willing to be a little more flexible on price than it has in the past, but the iPhone SE demonstrates that the company is (a) aware of that fact and (b) on the case.
My view, then, is that both sides are right. Wall Street is right that, in the short-term, nothing magic is going to happen. Not this quarter, not next quarter, maybe not even with the next iPhone release – whose rumors currently sound rather less exciting than Cook’s tease. But I see no reason to be pessimistic in the medium to long term. Apple will continue to innovate, and it will continue to expand its global footprint.
I’m not expecting to see the stock price start shooting up anytime soon, but nor am I expecting Apple to gradually slide into obscurity. Wall Street is right in its short-term outlook, and Cook is – probably – right about the company’s long-term prospects.
What are your own views? Are you a pessimist or optimist where Apple’s medium- to long-term future is concerned? Take our poll, and share your thoughts in the comments.
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