Apple (AAPL: Charts, News, Offers) investors have long been accustomed to riding the waves that the rumor mill churns up, mostly circulating around the company’s founder, architect and ultimate savior CEO Steve Jobs – the stock rises and falls with his health. The latest news out of Silicon Valley regarding Jobs’ medical leave ahead of earnings, when Apple has traditionally been the most vulnerable due to traditionally conservative guidance and impossibly high expectations generated by the Street and the public, has many investors worried. The stock has been breaking through new highs for nearly a year now, with its market cap exceeding Microsoft (MSFT: Charts, News, Offers) and closing in on ExxonMobil’s (XOM: Charts, News, Offers) top spot, which has many market watchers wondering, is it finally time for a major pullback in this traditionally volatile, high-beta stock?
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Shares of AAPL held relatively steady in Wednesday trading, with its mere 2.25% drop far smaller than some were expecting, but investors focused on the company’s long term future have real concerns. In addition, the company reported astounding earnings after the market close, with a profit increase of 78% at $6 billion, and record revenue of $26.7 billion, with an EPS of $6.43. Analysts had expected revenue of $24.12 billion with an EPS of $5.29. The company reported a 23% increase in Mac sales, an 86% jump in iPhone sales, and a 7% decline in iPod sales, most likely attributed to the iPhone cannibalizing the line of portable media players and not direct competition. Apple’s shares regained 1.25% in after-hours trading, to the relief of investors who had been expecting the worst.
Prior to Steve Jobs’ 1997 return to the company he founded and was subsequently ousted from, Apple had been marginalized by the massive market share of Windows PCs. The 1990s was a time of experimentation for the company; Apple attempted to develop alternative platforms to the flagship Macintosh such as the A/UX, a combination of the Apple and Unix platforms for servers, and collaborated with America Online and Compuserve in the development of Mac-only portals to insure a smooth transition into the age of the Internet. The company also partnered with IBM (IBM: Charts, News, Offers)and Motorola (MOT: Charts, News, Offers) to develop the new PowerPC, later christened the Power Macintosh. During this decade the company also manufactured the widely lambasted touch screen Newton, seen as a precursor to the iPad and iPhone. In 1996 CEO Gil Amelio began massive layoffs across the board in order to compensate for the company’s financial losses, and failed to invigorate the company’s sickly Macintosh line. The stock price fell to record lows in the $3-$4 range, and the board ousted him, replacing him with its prodigal son Steve Jobs.
Jobs’ tenure at Apple, in which he developed the repackaged iMac, iPod, new MacBook, iPhone and iPad product lines, has become a Silicon Valley legend, with the “Magician of Infinite Loop” launching hit after hit to a rabid public which elevated the company to a cult elitist status. The stock now towers in the $330 range, after being on fire for most of the past two years, profiting through the global financial crises, yet still trades with a forward P/E of 14.49 and a PEG ratio of 0.87, suggesting that the stock still has legs to run despite approaching the market valuation of energy giant ExxonMobil. As one of Disney’s (DIS: Charts, News, Offers) largest shareholders through his sale of Pixar, Jobs has also used his media muscle to bring Disney programs, from networks such as ABC and ESPN to his technological ecosystem hub, iTunes. iTunes, the online realization of the Apple Store, has tied together all his iOS products in a clean package – offering Apps, Songs, TV Shows and Movies to customers lacking the overhead and inventory of brick and mortar stores. For the better part of the new millenium, Jobs’ product launches have been met with widespread acclaim and market-wide mimicry; the high capacity iPod and active lifestyle-focused Shuffle changed the style of MP3 players permanently; its iPhone line has been seminal in the deluge of touch-screen smartphones; and its iPad line, which is expected to launch its iPad 2 successor soon, sent hardware vendors Hewlett-Packard (HPQ: Charts, News, Offers), Research in Motion (RIMM: Charts, News, Offers) and Motorola scrambling to dent the majority tablet market share Apple has captured.
Jobs’ secrecy regarding his fragile health have not worked in his, or the investors’ favor; in 2004, Jobs announced his diagnosis of pancreatic cancer and his subsequent cure in the same day; in the first half of 2009 Jobs was absent from his post again for a related liver transplant, and now in 2011 he has taken another medical leave of absence citing health complications. In each of these instances, COO Tim Cook oversaw the day-to-day operations of the company. Cook’s greatest accomplishment as COO was the closure of costly outsourced factories and warehouses worldwide, instead opting to hire independent contractors for parts. This reduced inventory levels significantly and boosted margins. Cook is certainly the most reliable choice to lead Apple – baseless rumors that he was being poached by Hewlett-Packard last year were enough to cause the stock to drop 6% at the market open. Jobs has stated that he will remain the CEO of the company and make major strategic decisions. Some large investors are now increasingly vocal about their desire for Apple to offer a dividend or announce stock buybacks from its massive $50 billion cash pile, an issue Jobs has skirted repeatedly.
For now, analysts are not concerned about the company’s near term product line – as its product cycle is long; however, if Jobs’ departure is permanent, as many fear, what threats does Apple face in its industry? The biggest thorn in Apple’s side is former ally Google (GOOG: Charts, News, Offers), which chaotically dominated the mobile software market by using the Microsoft strategy of free and pre-installed software. While Apple is a single hardware and software vendor, which allows it to customize and optimize its operating systems, Google has sprayed its freely distributable OS, Android, across handsets and tablets high and low, offering them lucrative profit sharing deals for their search services. In addition, Google’s various applications dominate the landscape of home computing – Gmail, Maps, Docs, Books and its omnipresent search engine give the company a much larger playground to profit in, as opposed to Apple’s often criticized “walled garden” philosophy. In addition, Google’s lack of hardware devices offers it a high degree of flexibility and mobility, as well as lower overhead. However, various governments across the world have been setting speed bumps in Google’s way, after the controversial Wifi snooping scandal made headlines across the world and its anti-competitive tactics were questioned. Google may hit costly roadblocks in its quest to dominate the Internet as we know it, while Apple has yet to hit any serious anti-trust legislation.
Other News About AAPL
Apple Beats Earnings Estimates to a Pulp
Apple continues to astound investors with record earnings.
Steve Jobs leaves behind deep bench of talent at Apple
How will Apple function without Jobs?
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
