"Apple is a different kind of company — it is on a mission of making products you didn’t know you wanted but then can’t live without. The financials follow,” UBS analyst Steven Milunovich said in a recent note to clients. (Click Image To Enlarge)
Apple Inc. investors have made it clear they want growth, which is why the company has lost 12% of its market value since Jan. 23, 2013, when it reported a flat quarterly profit and warned revenue growth would continue to slow.
Using some of its US$137-billion in cash to pay a bigger dividend, buy back more stock or issue preferred shares would surely staunch the decline in market cap, which has dropped 35% since last September. But Apple became a market darling because of its innovative products and that’s what investors really want to see more of.
Apple Inc (NASDAQ.AAPL) shares have plunged from a high of 702.10 on Sep 19, 2012 to 448.85 on Feb 20, 2013,a drop in total value of 36.1% (Click Image To Enlarge)
UBS analyst Steven Milunovich said in a recent note to clients.
“Apple is a different kind of company — it is on a mission of making products you didn’t know you wanted but then can’t live without. The financials follow.”
But creating the next big product is no easy task, which is why investors are calling for Apple to expand its iPhone offerings, chiefly down in price and up in screen size.
Mr. Milunovich estimates a sub-$300 iPhone could increase Apple’s addressable market by 40% or more, giving it easier access to emerging markets such as China and India. But he also believes there is a fine line between attracting more revenue and damaging its image.
Mr. Milunovich said.
“Apple is a premium brand that perhaps should worry more about diluting its image than its margins. Apple is not a true luxury good in that it sells to the masses, but the brand expectation is of exquisite quality.”
Barclays Capital PLC analyst Ben Reitzes believes Samsung Electronics Co.’s momentum in the smartphone market requires Apple to expand its iPhone market substantially in 2013, as well as improve its platform.
He expects Apple to offer a lower-cost iPhone through new carriers such as NTT Docomo in Japan and China Mobile in the next few months. By this time next year, the analyst anticipates Apple will also have a five-inch phablet, which combines the functionality of a smartphone and a tablet.
However, Mr. Reitzes said Apple’s next great innovations need to come in the form of software and web/data services.
For example, he believes the iPhone 5S’s key feature must be fingerprint authentication, which could eventually be used in a secured payments system. And since younger users are less inclined to build huge iTunes libraries, the analyst thinks it’s time Apple entered the music streaming business.
He said in a report.
“We believe these services are needed to keep Apple’s ecosystem ahead of the pack and to attract and retain users.”
The analyst suggested the seeds of this innovation may emerge when the company previews iOS 7 as early as March at an iPad launch event.
He said.
“We believe Apple can turn perceptions of its platform around with a real move into payments, an integrated iOS-led television service and improvements to iCloud (including subscription-based services.”
Further ahead, there is the possibility of an iWatch, which could act as an office manager by coordinating the use of other Apple devices.
Eric Jackson, president of Ironfire Capital, a technology-focused hedge fund said.
“We’re still at the tip of the iceberg for wearable computing.”
He highlighted the recent launch of Nike Inc.’s social network-friendly FuelBand, which measures things such as time, calories and steps, as well as Google Inc.’s augmented reality specs that may released later in 2013.
Mr. Jackson said.
“Apple has proved again and again that they are able to come up with new and interesting products that will keep revenues moving higher.”
He noted Apple has earned the luxury of being able to both return more capital to shareholders and invest in developing products for growth.
Mr. Jackson said.
“I don’t think it’s an either/or. They’re going to have a chance to prove the critics wrong.”
COMMENTARY: I remember when I warned everybody that the "smartphone wars are not over" back in 2011, but little did I know the intensity of the competition that would come along. Samsung answered the call and went on the attack in 2012 by capturing the lead in total smartphones from Apple. Although the Apple iPhone 5 outsold and took the lead from Samsung's Galaxy SIII in Q4 2012, Samsung still remains No 1 in overall smartphone unit sales and market share by a healthy margin for Q4 2012 (see my blog post dated February 20, 2013).
Top 5 Smartphone Vendors, Shipments, and Market Share - Q4 2012 (In Millions of Units ) - IDC (Click Image To Enlarge)
I predict that the Samsung Galaxy SIII will regain the lead in unit sales and market share from the Apple iPhone 5 in Q1 2013, because sales of the iPhone 5 have shown signs of slowing down (denied by Apple CEO Tim Cook) amid reports that the iPhone 5 is just too expensive for consumers in China and other developing nations. Here are a few facts:
- Customers love the S3's huge 4.8-inch OLED display over the iPhone 5's 4-inch Retina display. On January 24, 2013, Tim Cook defended the smaller display of the iPhone 5 by saying: "The iPhone 5 offers as you know a new 4-inch Retina display, which is the most advanced display in the industry and no one comes close to matching the level of quality as the Retina display. It also provides a larger screen size for iPhone customers without sacrificing the one-handed ease-of-use that our customers love. So, we put a lot of thinking into screen size and believe we’ve picked the right one." Tim Cook is definitely overreaching here.
- On January 14, 2013, Apple reduced by half orders for LCD panels for the iPhone 5 from Sharp. A clear sign that iPhone 5 sales are softening.
- In early January 2013, the Wall Street Journal reported that Apple cut component orders for the iPhone 5 due to weaker-than-expected demand, with orders for iPhone 5 screens for the January-to-March quarter dropping to about half of what the company had previously planned to order. Orders of other components were also reduced.
I think that since former Apple CEO and founder Steve Jobs passed away in 2011, the company has lost its innovation mojo. When the first touchscreen iPhone was introduced in June 29, 2007, it was a wakeup call for the entire smartphone industry. Everybody was caught off guard. Apple immediately gained a two-year head start in the premium priced touchscreen smartphone category. After four years, Apple has lost that advantage, and is no longer the innovator, but simply leading by making incremental changes (SIRI, Retina display of iPhone 5, iPad 4 and Airbook).
Fast Company's Bruce Nussbaum claims that Apple has lost its aura and is now in it more for the money and economic gains than true innovation. Nussbaum says.
"The erosion of Apple’s Aura is so threatening to the company. This erosion appears to be widespread. The utter disaster of Apple Maps and problems with the latest version of iTunes disconnects the community and puts barriers between the 'object' and the 'subject' of Aura. There is no beckoning in bad products and no desire for losing the self in belonging by the consuming audience. Selling bad products is a betrayal of the Apple community and turns users’ strong emotions from love into anger. Who wants to identify with incompetence, rather than cool? This undermines the emotional engagement people have with the company."
Nussbaum blame's the decline in Apple's aura from a shift in what used to matter: to designing simple, beautiful and elegant products that people lust for, to money. He says.
"The shift in Apple’s narrative frame from awe to money is changing the meaning of belonging, a crucial ingredient of Aura. Instead of new and wonderful things that make our lives better, we hear constant talk of share prices, cost of iPhones, and price points in the 'globalization' of products. Charging for the iCloud introduces a tax to belonging to the community. And cutting costs by threatening to fire the competent and friendly staff in Apple stores--the physical 'face' of Apple to its followers--marks a distancing of the company with its followers. Apple once provided an optimistic, modern, creative existential meaning to its customers, who wanted to belong and were willing to pay extra to get into the community. But now it’s as if Apple has set out to break the bonds that connect it to its community."
I agree with Nussbaum. Tim Cook is no innovator. Steve Jobs was an innovative genius and the best product picker in corporate history, who relinquished the operations side of the company to Tim Cook, while Steve was free to dream up the next new product. With Steve Jobs now gone, Tim Cook's weakness in new product innovation has become glaringly clear. Apple's aura has lost its luster. Far too many things are falling through the cracks (Apple Maps, weak iPhone 5 battery, small display of the iPhne 5, and SIRI is not as good as Google search). This sort of thing would never have happened under Steve Jobs who strove for absolute perfection and demanded this from his new product development team.
Apple CEO Tim Cook (left) and the late Steve Jobs (right) during a new product unveiling (Click Image To Enlarge)
Apple truly needs a big new, bold, exciting and breakthrough product that can make them reclaim their innovative lead and balls out market leader, not a leader by incremental improvements of existing products. Just how much can you cram into the iPhone 5 (dubbed as the thinnest smartphone)? The Retina display was nice, but the OLED display in the Galaxy S III is almost as good. Apple no longer has an overwhelming lead in mobile apps. Android developers have narrowed that gap, so apps are no longer an issue.
Steve Jobs used to create the products of tomorrow that people didn't know they needed yet. He strove to create products that "put a dent in the universe." Tim Cook is so far removed from new product innovation that he has to depend solely on Jonathan Ive, Apple's chief new product designer for new product ideas. He was highly regarded by Steve Jobs, who called Ive his "spiritual partner at Apple."
Jonathan Ive (left) and the late Apple CEO and founder Steve Jobs (right) (Click Image To Enlarge)
Late last year, Tim Cook put Ive in the position of heading up Apple's Human Interface (HI) design across the company's products. Known for his work on Apple hardware, the British designer has worked his way up the ranks at Apple. Still, I have to wonder whether Jonathan Ive has the chops to dream up the next new breakthrough product of tomorrow that consumers don't know they need yet. Steve Jobs used to bring those incredible new product ideas to Ive, and Ive would run with them and design the finished product so that it would be nearly flawless and meet Jobs exacting requirements for ease-of-use, elegance and simplicity. But with Steve Jobs now gone, there is no fire starter or originator of new product ideas. This void has become painfully apparent, and investors have definite reasons to worry about Apple's future, and many of them are dumping shares quicker than you can say "Jobs."
Time of Apple New Product Releases 1981 through 2010 (Click Image To Enlarge)
Courtesy of an article dated February 20, 2013 appearing in the Financial Post, an article dated February 17, 2013 appearing in Fast Company Design, an article dated February 20, 2013 appearing in Tuaw and an article dated February 20, 2013 appearing in ValueWalk
Comments