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Apple Really Is in Trouble This Time

Mitch Wagner
1/4/2019

Apple haters love to predict the company's demise. Several times a year for more than a decade, skeptics have declared that Apple has lost its mojo, the company is failing, it has forgotten how to innovate, it's on the way out.

The haters are at again, following Wednesday's announcement from Apple Inc. (Nasdaq: AAPL) CEO Tim Cook. But this time it's different. This time, Apple really is in trouble. (See iPhone Upset Leads to Apple Crumble.)

One of the primary goals for any public company is to keep investors informed -- particularly of bad news. And Apple has failed in that responsibility.

Worse for Apple: its business challenges aren't going away.

Apple on Wednesday announced a significant shortfall in its holiday iPhone sales, expecting revenues of $84 billion for the quarter ending in December, down from previous expectations of $89-$93 billion. (See Apple Delivers Post-Holiday Turkey, Lowers Revenue Guidance.)

Apple has two problems here: failure to communicate expectations, and failure to innovate.

Failure to communicate
On communicating expectations: China's slowdown has been a long time coming, and Apple hasn't been paying attention, notes Bloomberg's Shira Ovide. On Wednesday, Cook blamed Apple's shortfall largely on slowness in China for the second half of the year. US President Donald Trump imposed tariffs on China in July, after months of threats. These problems were already boiling two months ago when Cook said China business was "very strong."

"Apple failed in the No. 1 mission of being a public company: being honest with investors about its business," Ovide says. "The company simply denied the reality that was staring it in the face, until denial was no longer an option."

Cook should not have been surprised by weak China sales. He should not have allowed investors to be surprised.

This is an area where Cook suffers by comparison to his predecessor, Steve Jobs, who was a genius at communicating with Wall Street -- particularly when he had bad news to deliver, says Apple blogger John Gruber. "Jobs's arrogance got him into trouble at times, but at other times it was his saving grace," says Gruber. Cook's "genuine and inherent humility holds Apple back on days like today. Apple needed less 'I'm sorry, let me explain' and more 'F*** you, this is bull****, let me explain'." (Only Gruber doesn't use asterisks.) Gruber thinks Apple's quarterly problem is a glitch, driven by problems in China that affect everyone. The iPhone itself is strong, says Gruber.

Here, Gruber falls down. iPhone sales have been essentially flat for 18 months, with Apple offsetting the trend with higher average iPhone sales prices, Ovide notes; that strategy wasn't going to last forever. Smartphone sales overall were down for four consecutive quarters in the third quarter of 2018, according to IDC. The smartphone market is a victim of its own success; consumers are happy with the phones they have and are in no hurry to upgrade. The iPhone accounts for 60% of Apple's business; if the smartphone market is in trouble, then so is Apple.

Next page: Apple can still innovate, but not in ways that matter

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brooks7
brooks7
1/7/2019 | 1:21:59 PM
Re: Mature Company
Mitch,

To answer your question first, depends on what you mean.  Apple will not likely be able to replicate the run that is has been on when Steve Jobs came back.  Investors will lower the value of the company relatively (and already have).  Apple has a lot of cash and will be around for a long time.

The question is will Apple become Kodak or IBM?

Kodak was a DOW 30 component and today (according to Yahoo! Finance) has a market cap just below $120M.  Kodak was a great company and really screwed up the transition to digital photography.  Today, Kodak is an afterthought.

I agree IBM has changed a lot and has done so successfully.  To me, IBM's peak was back in the days of the mainframe.  IBM had such a large marketshare that the DoJ required that IBM publish internal protocols so that other's could compete with it.  IBM did so and there were a large number of companies that produced their own Cluster Controllers and Terminals.  IBM essentially ignored the minicomputer business and was not hurt by it.  That is how DEC, DG and others survived...particularly in the controls and embedded computer space (yes it is probably funny to younglings that a PDP-11 was an embedded computer for some applications).  When IBM came out with the IBM PC (and the the AT and XT), it validated the market for personal computers in business applications.  PCs were extremely rare at the time (we used to design products using parts to make Apple II or RDOS kit computers to save money and "sample" our way into a computer and in fact the first personal computer I used in business was actually a Lisa).  IBM lost control of the computer market at that poing.  IBM tried to regain control by introducing Token Riing to use instead of Ethernet.  But it lost this war and IBM wobbled quite a bit and hired CEOs to reposition the company.  It came through eventually, but it was not clean or easy.

seven

 
Mitch Wagner
Mitch Wagner
1/5/2019 | 4:02:00 PM
Re: Mature Company
For me, IBM is a case study of companies successfully reinventing themselves. They were floundering in the early 90s and reinvented themselves as a business services company, rather than a technology vendor. 

Microsoft is another example, embracing applications, servers and the Internet in the 90s and the cloud today. 

Both companies were redefining their focuses on their core identities. The core identities remain the same, though the expressions of those identities are vastly different. 

Apple's core identity is providing excellent end-user experience to people willing to pay a premium for quality. 

Also: I'm going to refine a couple of the comments I made in the above article: Sure, the original Mac was revolutionary but it wasn't enough to keep Apple prosperous. The 1997 iMac was a highly successful product, and the iPod was downright revolutionary. But NONE of these things were successful on the scale of the iPhone. Nothing has ever been as successful as the iPhone -- from a business perspective. The iPhone's growth, and its Android sucessors, literally transformed society, and it was so FAST. 

Apple is a boutitque company that surprised itself with a mass-market hit. The thing to do there is NOT try to repeat the miracle again, and just go back to boutique business -- with a big cash hoard -- while continuing to ride the mass-market hit as long as it can. And the iPhone still has a few years in it, at least. 

But will investors allow that?
brooks7
brooks7
1/4/2019 | 3:50:18 PM
Re: The trouble with trouble
@Phil,

Flat to small up markets aren't dying.  They are just mature.  Mature markets are stable, which investors in many ways like.  You can predict the financials from such a stable market.  

Now what that might mean for Apple....

1 - Maybe you slow your roll with new devices, making one every 2 - 3 years instead of 1.  Lots of job cuts there.

2 - You redeploy your money savings to do something else.  Maybe there is something futuristic out there, but I don't have a good idea on what that might be at the moment.  

3 - Maybe figure out a way to get iTunes on (*gasp*) Android?

There are several other changes going on in the consumer device/sw/content world at the moment.  I suspect this means we are about to have another tech revolution:

- The console market is in a real funk...I mean really come out with a new console to play old games.

- AAA gaming titles are definitely in a funk.  If you think the comm service providers are awful - Check out Bethesda Software and the utter debacle that is Fallout 76.

- The movie market is in a decline and the lone bright spot - The Marvel Cinematic Universe - is coming up on the end of a cycle (hey what happens when Cap, Iron Man, and Thor all go away after the next Avengers movie).

- There are more ripples of anger at Youtube from content makers (see Article 13) and the money replacement (Patreon) giving some content folks a bunch of crap.

So, I think we are in a time of change and uncertainty across much of the consumer tech/content landscape.

seven

PS - Anybody tried the Comcast Mobile Service?

 

Written on my brand new desktop...hey if you like online gaming Desktop >>>> Laptop.
Phil Harvey
Phil Harvey
1/4/2019 | 1:48:18 PM
The trouble with trouble
I wonder specifically what kind of trouble awaits Apple as the smartphone market slows down.

I pose the question from behind the glow of my desktop computer, which no one needs anymore because that market died years ago. 

-ph
MindCommerce
MindCommerce
1/4/2019 | 1:03:09 PM
Will "Next Big Thing" Save Apple???
Apple has been through cycles like this before and come back stronger than ever, but will this time be different??

Arguably, smartphones are becoming saturated from a penetration perspective, and it's difficult to keep up the replacement cycle with $1,000 phones. This calls into question: What will be the next Big Thing.

Would argue it's not going to be "Smart Watches" !!!

What are your opinions? 
brooks7
brooks7
1/4/2019 | 12:00:31 PM
Mature Company
 

Wall Street already considers Apple a mature company.  Apple's TTM P/E is between 12 - 13 (with a Forward P/E of closer to 10 and a PEG < 1).  Proctor and Gamble - not exactly a rocket ship - has a P/E of 23 or so.  High Growth companies expect to have a P/E of 30 - 40.

What this signals to me is that investors have judged Apple to have reached the peak of this cycle.  Companies and Products go through life cycles.  Apple has survived a couple of these (remember the state of Apple after Jobs left the first time).  Great companies re-invent themselves constantly.  It is why so few companies last for 100s of years.   I think IBM is a great case study here.  They started by making adding machines and other old tech business items.  They are clearly imperfect and have had struggles as they change the company.  Apple might be in that state that IBM was in the 60s and 70s with mainframe computers.  It may never have the chance to dominate a market again, but that does not mean that it is going away anytime soon - they have $25B in cash.

seven

 
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