Apple reported its best quarter in history and met or exceeded estimates on all counts except Macs (for which it had supply constraints). Yet the stock sold off nearly 10% last night in after hour trading. Apple now sells at 5.6x forward FY2014 earnings estimates (excluding cash). The stock has been beaten up beyond all rationale as Apple still holds a strong position in growth markets. To regain its luster with investors, Apple needs to take three actions.
Apple must remember it is a software company, not a hardware company. Apple sells delightful user experiences. Yes, that is a combination of software and services wrapped in terrific, tactile, slick form factors. But what really excites consumers and entices them to buy the products are what the products do for them, and that is software. Consumers embraced the iPhone 4S even though they had expected the handset to take a different form (hardware) but the iPhone 4S was in exactly the same case as the iPhone 4. Yet consumers had to have the iPhone 4S because it offered something new to Apple users: Siri, “an intelligent assistant.” And Siri could be your new best friend, you could talk to Siri and Siri could answer your questions. It became the feature you didn’t know about previously but had to have. Siri is software.
Apple has had a history of dazzling consumers with usability. When the iPod came out, users could scroll through thousands of songs faster than ever before (software). Apple let users multitask on smartphones when previously, one had to do one thing at a time on a phone. Examples are numerous, and the point is what makes people want to buy Apple products is the consumer experience, and what drives the consumer experience is software development. Software has given Apple an edge over competitors, because it brought experiences to users first. (No, Apple did not introduce all features first, but Apple made people take notice and want to have them, more on this later.)
However, it feels like sometime during 2012, Apple decided to focus on being a hardware company and not a software company. This is a subtle point: When it introduced the iPhone 5, Apple actually highlighted a 3-minute video on how the phone was manufactured. Hardware companies highlight characteristics like beveled edges. The key to marketing technology companies, particularly those selling to consumers, is to highlight benefits, not specifications. Apple has historically emphasized what its products could do for users, and led the way, by example, for technology companies on how to do this.
Here is the less subtle evidence: In 2012, Apple introduced two new iPads, in one year. Apple also updated its entire product line. It is rumored that in 2013, Apple will introduce three new iPhones. This strategy is beginning to feel a little like Nokia or Research in Motion where they kept introducing so many products into the market that consumers became paralyzed not knowing which product to choose. In Apple’s case, Apple asks its consumers to pay a premium for the latest design that promises a terrific user experience. Buyers want that experience to remain current (think fashion) for a year. When product refreshes come quickly, consumers feel a little defeated because even if they buy this new product, it will be old in six months or less anyway.
Apple needs to refocus on the software and the experience, and release fewer hardware choices. Get Siri to work flawlessly and add features that we can’t live without in Siri. Make iCloud work seamlessly and easily so we store all of our important stuff (media, photos, videos) in iCloud and make switching costs very high. (iCloud now has 250M users.) Keep adding features to iMessage and promote iWorks to work with Microsoft Office so no one has a reason to switch to a Microsoft Surface. And Maps. Maps are critically important to users, so get them right too. And the benefits of a great Map App extend to revenue sources of advertising and search.
Apple needs to regain the Jobs-esque marketing prowess. Yes, Steve Jobs was a master of marketing and he is gone. No one else across the industry has filled his shoes. Others in the industry have begun to mock Apple, and Apple needs to step it up and fight back. The key to Steve Jobs’ style was emphasizing product attributes that benefited users’ lives, not tasks. Apple offerings, under Jobs, improved one’s lifestyle, and were described in those terms, “a thousand songs in your pocket.” Most people are lost trying to articulate what the iPhone 5 does for them. Faster calling? More apps on one screen? What Apple needs to do is tell users why any feature is relevant at the base level of lifestyle. And Apple needs to describe how it improves doing the things we enjoy, not the things we have to do.
I asked: Is Google the New Think Different? There were a lot of comments. Different does not mean better, although it could, but it does not necessarily. But Different does create intrigue and cheaper does lower switching costs to check out a new product, if Apple users do not have enough messaging to stay within the Apple ecosystem. Many of the comments to that article related to Apple providing a sound reliable experience that kept those users loyal to Apple. This is compelling, and marketable. While Apple does not like to bash its competitors, its commentary on other tablets in the market was effective messaging (ie, paraphrasing here: “Other tablets must stay in drawers because they aren’t accessing the Internet.”) Apple needs to refocus its messaging back to lifestyle benefits of its products in such a way that we, consumers, cannot live without its products.
Apple needs to split its stock. Apple’s stock is perceived to be expensive because it has a price tag, per share, of many hundreds of dollars. The stock is high-priced but not over valued. It is cheap and undervalued at less than 6x forward earnings. Many of Apple consumers can’t afford the stock because it is more expensive than upgrading (with contract) to an iPhone 5. Apple should reward its consumers and split the stock, and let the very people that have propelled it to its success participate in its future success.
Many suggest that stocks like to maintain its high dollar price tags in order to keep retail investors, considered fickle, out of a stock. However, in the case of Apple, retail investors, I contend, are more loyal to the stock while institutional investors, including hedge funds, are whipping the stock around. I have written several articles on the merits of an Apple stock split, including broader distribution, less volatile holders, and giving back to the consumers who made the company great. See these articles on Apple stock split:
Five Reasons Apple Should Split Its Stock And Four Reasons It Shouldn’t
A stock split would unleash value, and allow the stock to trade to a normal level, which at the low end would be at the growth rate, and at the high end, would be two times the projected growth rate. That would offer investors upside of almost two to four times where the stock is trading today.
Summary. Perhaps Apple is paying too much attention to the noise when, under Jobs’ stewardship, it carved its own path and told consumers why they could not live without its products. Today, it feels like Apple isn’t leading its own destiny but responding to the marketplace by offering more hardware, considering lower end alternatives (if you believe the rumors), and focusing on hardware attributes rather than software experiences. The motive for this strategy could be to create company value, but the result has been to destroy company value. The company has lost 34% of its value in the last couple of months. Apple needs to stick to its knitting and recover its value, both to the consumer and to the shareholders.
