What’s Next For Apple and Tim Cook

The Original Apple Logo. That’s Isaac Newton.

Tim Cook has juste celebrated his 10 year tenure at the helm of Apple. Under his reign Apple’s market cap went from $350 billion to $2.4 trillion. No other CEO has created more absolute value for shareholders. Sales went from $108b to $274b in 2020. Net profit went from $26b to $57b.

Before him Apple was being run by co-founder Steve Jobs. Not the smallest shoes to fill. Do you remember what was being said back then? Steve Jobs was Apple. Steve Jobs was the guy behind the 2nd coming of Apple. Steve Jobs was behind some of the most iconic innovation in consumer electronics. Steve Jobs was one of the greatest business man ever. Steve Jobs was celebrated. Steve Jobs was bigger than life.

So who’s Tim Cook? The supply chain guy? Not exactly the profile you look for when trying to inspire employees to create “insanely great” products. The Apple fanboys weren’t thrilled and worried that the company was destined to decline.

After ten year, Tim Cook can look back with satisfaction. Tim Cook has created more value than Steve Jobs. The question now is who is worthy enough to replace Tim Cook when he’s done? Who can take a $2.4t company to the next level? I’m sure they are looking at the supply chain employee list.

Tim has maintained Apple’s record of innovation and its brand. He took Steve Job’s creation and made it better and bigger. This is definitely a business school case study. This is the greatest business transition of all time.

Under Tim Cook, Apple exploited four trends:

1. Global supply chain – it has built an immense production network with China at the center.
2. Chinese consumers – $60b in sales, 5x what it was ten years ago. China loves Apple and Apple loves China.
3. Government were lax about tech giants with high market share – 60% revenue market share in America and a dominant position in OSs. Just look at the nice billions ($8b-$12b annually) it gets from Google in return for making it the iPhone’s search engine.
4. Low taxes – Thanks in part to legal structure using tax havens, Apple’s tax rate was around 17%

However these four trends are becoming less favorable.

1. Geopolitical tensions threaten global supply chains.
2. China under President Xi Jinping is becoming more unpredictable. His policies makes it less attractive to rely on Chinese consumers for 19% of sales.
3. Governments around the world are targeting big tech. Big tech are easy targets for regulators and politicians.
4. The tax bill is going up. A deal brokered by the OECD may gradually forcer multinationals to pay more tax.

The next ten years won’t be easy for Apple and Tim Cook. What’s the plan? Apple will continue to shift towards being a subscriber-based firm. It has over 1 billion users who enjoy an array of services (21% of sales). They have one of the most beloved brands. In a toxic digital world, people can trust Apple. Apple is still about beautiful designs and high-quality manufacturing. They will continue to advance and push innovation. The iPhone 13 looks promising (50x faster than the iPhone 4, first iPhone under Cook). They are also pushing deeper into health, news, entertainment, music, gaming and services. And it will continue to try to invent a new generation of hardware. The rumor of a iCar or iGlasses pops up from time to time. Apple is looking into pushing deeper into search.

Apple is also shifting part of their supply chain to America. Long-term assets have risen to 70%, from 38% when Cook started as CEO. I’m sure he’s looking at plans to pivot away from China in case things go sideway. But I think the company has navigated its relationship with China well so far. China is a large market for its product and services, but also Apple creates significant employment in China.

Tim Cook was a big believer in the App Store (Job was ambivalent). Cook understood the importance of network effects. He understood the economic mechanism in digital markets which makes big businesses even bigger. Cook pushed hard on the digital “flywheel”: the App Store attracts more app makers, which attracts more users, which attracts more developers and so on. Today there’s nearly 2m apps, which facilitate $643b in billings. Apple takes a big bite of that.

iPhone 13

A short comment on the new iPhone 13. Every announcement is predictable. There’s no surprises. Every iPhone announced isn’t a huge step up from the previous one. But little incremental improvements, consistently, for a long time is a recipe for success. A faster processor, a better camera, a better battery, higher memory capacity, and more expensive.

I’ve no clue how many they will sell, but I’m sure it will be a lot. There’s a fight among analysts that are trying nail exactly how many people will buy and upgrade their phones. There’s over 50 analysts covering Apple and many more on Seeking Alpha. I don’t have a particular insights. People are looking at wait time on the Apple website for demand signal, or supply constraint. I’m not that guy. All I can say is I’m invested in Apple for more than just a phone cycle and that has worked well.

Summary

There’s no doubt that the next ten years will be tougher than the first ten. How do you keep growing? How do you keep these fat 40% gross margins? The App Store commission are trending downward.

But who would have though that Apple would have been a $2.4t company ten years under Cook? Even $1 trillion was a massive milestone. The Apple today is a better version of the pre-Cook Apple. Tim Cook is likely to stick around until 2025 when his current stock grant fully vest (but I doubt it’s about the money).

Disclosure: Long AAPL

Apple’s Spaceship

Flawless curves, milled aluminum, endless glass, walled garden, it sounds like an Apple product. I had a chance to visit Apple’s new $5 billion “spaceship” headquarter.  Visiting is a strong word. I was allowed to look at it from the across the street. The spaceship is not open to the public. It’s not open to must Apple employees. Only Apple employees that have been transferred are allowed in. I’ve been told that 200 employees a week are making the transfer. The spaceship is expected to hold ~13,000 employees.

The Apple Park seen under construction in Cupertino, California in this aerial photo taken on Jan 13, 2017. Photo: Reuters

The centerpiece of Apple Inc.’s new headquarters is a massive, ring-shaped office overflowing with panes of glass, a testament to the company’s famed design-obsessed aesthetic. Apple’s latest campus has been lauded as an architectural marvel. The achievement is to make a building where so many people can connect and collaborate and walk and talk. A “statement of openness, of free movement” as Apple states it. The building, crafted by famed architect Norman Foster, immortalized a vision that Apple co-founder Steve Jobs had years earlier. My Apple “guide”, a guy named Joe, told me that the building is more than 90% Steve Jobs’ vision. The concepts and design were in place way before he passed away. He hated the current headquarter (the one on Infinite Loop) but that’s all Apple could afford at the time. Today Apple’s balance sheet situation has since improved enough for them to afford a fleet of spaceships if they wanted to.

Conan O’Brien on Apple

This explains the fat margins!

Apple – The Numbers Part II

Here are some of the reasons why Apple is under pressure. It used to be that every time Apple released a product there was a Usain Bolt advance between 1st and 2nd. You couldn’t name who was in 2nd place. They were irrelevant. If they mentioned anyone it was the spectacular Nascar crash of RIM and Nokia. Now with the release of the iPhone 5 the difference between 1st place and 2nd place is pretty blurry and when you leave a decision in the hands of the judge everything is arguable.

Apple’s cash cow, the iPhone 5, is severely under assault.
iPhone 5 = 65% of Apple’s overall profit. Gross margins: 55%

These hot numbers are under attack. Such fat margins are not sustainable. It attracts competition. And now the competition is not inferior to Apple anymore. You can have a debate that the Samsung Galaxy S3 is equal or superior. Microsoft has some credible phones and early reviews of RIM’s Blackberry 10 claims that it will be the best smartphone to hit the market. Carriers like Verizon are less likely to fork over $400 for every sale of iPhone sold.

New products like the iPad mini are more costly to produce and are not as profitable. The release of the iPad mini represents a defensive move by Apple. They used to be the leading proactive company and now they are becoming more and more reactive to the competition.

The bottom line: It’s getting harder and harder for Apple to justify that you pay over $500 for a phone. Competition will bring price down to grab market share.

Photo Credits: Ferrum College/News

Apple – The Numbers

Apparently not only a new iPhone will set you back financially, Apple’s shares (AAPL) will do the job too. The value of the shares have been plunging faster than the resale value of an iPad and it seems that they don’t have an app to stop it.

The shares are in free fall after last quarter’s numbers. Shares are down 10% following the results of the holiday quarter and more disappointing; the stock is trading for about $450, down from the $700 high back in September. On the company’s conference call, Tim Cook, the CEO, described Apple’s results as “extraordinary”. And he is right, they were extraordinary.

Revenue: $54.5 billion
Profit: $13.1 billion, compared to $13.06 billion last year
iPhone: 47.8 million, compared to 37.04 million in Q1 last year
iPad: 22.9 million, compared to 15.43 million in Q1 last year.

Of course they are extraordinary, they just had a record $54 billion in sales in one quarter. Any company that achieves that kind of number is excellent. And they have monster record profits. And they have $137 billion cash sitting in their bank account. And they have cool products that people wait in line for day to buy. They sold 10 devices per second last quarter. They sold more products last quarter than they ever sold before.

So what’s the matter? Why are the shares crashing? How can investors not be happy with these kind of numbers?

Investing is a game of expectations. The company grew less than analysts expected. That’s it folks. Every quarter you have to match or beat the analyst’s numbers or you take a beating. Why? Because a stock is price in functions of future expected earnings. After all you are investing your money for a future stream of earnings. If it wasn’t for expectations Wall-Street would be honoring Apple right now because of record sales and profits. For comparison, Netflix crushed the analyst’s expectations and the shares went up 30%. To use a football analogy, imagine a receive just caught a super important pass and he is one inch out of bound. It nullify everything. Same with expectations.

So what’s next? After madness is gone their might be some opportunities. Investors need to stop being so emotional about Apple and need to treat it and value it like any other company. Apple is trading at 10x earnings, relatively cheap for a premier technology company. It has $137 billion and counting in cash on the balance sheet. They are paying some dividend and started a $45 billion share repurchase program. And their earnings are monstrous. They will not have hyperbolic growth they had last decade but they remain profitable. This time valuation might be on your side.

Photo credits: Reuters and Forbes

Information Ring – 2012 Holiday Editions

“Everyone has always told me I’m nuts when making investment decisions, but when you can look at something differently than other people, you can find opportunity.”

– Sheldon Adelson, Billionaire Casino Operator

$6 Billion Later
It took $6 billion to find out Obama remains President, the Democrats still control the Senate and the Republicans still control the house. Senate Democrats are fortunate to take two seats from the same two Republicans who made their controversial rape comments. Richard Mourdock, one of the losers and the only senate candidate that Romney endorsed, said that if you get pregnant because of rape, it’s a gift from god. The GOP certainly didn’t win any votes with that one.

End of the World
If the world doesn’t end on December 21st as the Mayan calendar predicted, the Americans made sure that there is a back up date to get the job done: December 31st. That date, nicknamed the Fiscal Cliff, is the expiration of the Bush tax cuts, payroll deductions, break for business, shift in the alternative minimum tax, debt ceiling expiration, and a lot of other stuff that will throw the economy and the world down a cliff. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.” The American government made sure that this will happen because it requires Democrats and Republicans to work together. Right now Obama is answering fiscal cliff questions on Twitter.

Obama 2012-2016 Agenda
Incredible how this election was run without knowing what each candidate will do. The whole campaign was focus on trashing each other’s past. With the pressure to be re-elected gone, let’s see what’s on the table for the next four years.
– Fiscal cliff (see above)
– Attack the deficit/debt issues
– Immigration reform
– Stimulus package for states to help hire public school teachers
– Massive infrastructure upgrade that will provide jobs to thousands of construction workers
– Plans to consolidate progress on financial regulatory and health care reform (Obamacare)

Romney Disheveled

iPhone 5 Prices

As previously mentioned the iPhone 5 has finally been announced. For all the features here is an article from The Globe and Mail.

Here are the prices:

The new phone will be priced the same as the current iPhone, starting at about $200 with a contract. Canadian pricing without a contract is starkly different $699 for the 16GB model and $799 for the 32GB model and $899 for the 64GB model. It’s coming out September 21st. It seems that the more expensive they are the more people wait in line. So get in line now….

It’s getting expensive to call somebody.

Apple and Their Surprise Bag – “The Biggest Product Launch in the History”

Tomorrow on September 12th Apple is set to make another major announcement. Apple loves those. They are great to build up hype and the secrecy of the event certainly gets media and people’s attention. Actually the event is no secret, we just don’t have a clue of what’s going on. They send nice little mysterious invitation and tell you to expect something big. One analyst went to say that this will be the biggest product launch in the history. The recipe has been so successful that other big companies like Microsoft have adopted the practice, like when they announced their new Surface tablet. Let’s see what will the next traffic jam at your local Apple Store.

Announcement time: 10 am Pacific time at the Yerba Buena Center in San Francisco Wednesday

Now the rumors.