Apple: "Twice as Fast" and "Half as Light" Won't Cut It
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After Apple's (NASDAQ: AAPL) recent plunge into the $450 zone, Tim Cook and his team need to begin asking the hard questions of what it will take to stop the downward spiral that has led to the company losing nearly $90 in market capitalization over the last month along. Hearing Cook's continuous words:
"We're thrilled with record revenue of over $54 billion and sales of over 75 million iOS devices in a single quarter. We're very confident in our product pipeline as we continue to focus on innovation and making the best products in the world."
This is not going to cut it going forward, because Apple must step outside of its comfort zone to create products that redefine a sector, a product, an industry. Though this stock sell-off is not directly related in leadership "mistakes," it can be attributed to a lack of innovation after Steve's death along with heightened competition in all of its business sectors. What differentiated Apple from the rest only a year ago was the company's perceived ability to create products that would redefine an area of technology and ultimately force its competition to follow in its tracks. The case today, though is far different. Google, Microsoft, and others have developed products and software that do not follow in Apple's footsteps, but rather walk alongside the acclaimed leader. The first quarter of 2013 illustrate that this may be the beginning of a new era for Apple. Although the company achieved record revenue, earnings did not show the growth investors expect.
(Apple Earnings Release)
These results coupled with 47.8 million iPhone's sold and 22.9 iPad's sold do not show fundamental weakness. What these results do show, though, is a company that is experiencing margin compression in an age of heightened competition. There is only one thing that Apple can do to avoid a further loss of market capitalization: innovate in order to force others to follow instead of merely walk in tandem.
What Apple cannot do:
The days of Apple making an iPhone "twice as fast" and "half as light" will not result in the same revenue/earnings boost that it has in the past. This is in large part because Microsoft, Google, Samsung, and others are doing the same thing. The Android operating system has brought incredible competition to iOS and in doing so has leveled the playing field between Apple and everyone else. Additionally, others like Microsoft are entering the tablet market while Mozilla FireFox has announced plans to develop phones that run on the new "Firefox OS." This creates a drastically different landscape for Apple than that which existed only a year or two ago. For Apple, its new innovation cannot be within making the iPhone slightly better or the iPad slightly lighter. These innovations do not drive incremental sales and profit to the extent necessary for substantive revenue and earnings growth. Apple has to be revolutionary, just like it was with the iPod, the iPhone, the iPad... But this revolution and innovation may come through different channels.
What Apple must do:
Apple must revolutionize an industry, while building upon the genuine that has become the world of iPhone, iTunes, iCloud, etc. This article is not meant to propose specific measures that Apple should take to regain its luster, but rather as a guide to what types of things investors should be looking for out of Silicon Valley from Tim Cook.
A entry into Google's sphere is one area that could revolutionize Apple's ability to integrate its devices for its customers and build upon its genius. This entry could occur in many fashions, but there are several that would make the most sense.
- An acquisition of Facebook would enable Apple to integrate the web with both its software and devices. Though this type of move (if Facebook were the actual candidate) would be substantive, this would allow Apple to compete head on with Google. This type of entry into the internet sphere, if done correctly, would place Apple well ahead of its peers in terms of full technological integration for its customers.
- A development of its own internet space that would incorporate the virtues and simplicity of its software into search, sharing, and social. This type of move on behalf of Apple would not only add alternative streams of revenue and earnings, but would further solidify the ecosystem Apple has created.
Another major opportunity for Apple is to extend into software and hardware capabilities into the realm of television and new forms of media. With Apple's proven success within iTune's (artist partnership) and clear ability to create seamless operating systems, this move into the field of television, streaming, and further content delivery to customers has the capability to further extend Apple's grip on the market. Only several days ago, Netflix announced stellar earnings due to the demand for its product. It is only natural for Apple to take advantage of its customers desire for efficient content delivery.
These two options are not an exhaustive list. There are plenty more similar ideas that would bring Apple back to the top. For investors, these types of innovations on behalf of Apple is what is needed to not only drive revenue, but more importantly keep Apple one step ahead of the curve in order to preserve its margin. The preservation of margin can only occur if Apple stays ahead of the competition and avoids the current trap where pricing is so important due to the rising level of competition within all of its business sectors. Investors should stay tuned for such releases on behalf of Apple, because they are the answer to driving incremental revenue and earnings. during this new age, simple tweaks to current devices will simply not be enough...
JustinWeinstein has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!