Following on from the wizardry of Steve Jobs was never going to be easy for Apple CEO Tim Cook. But five years on, analysts are wondering if the magic has disappeared.
By Chris Wright
In 2011, when Tim Cook took over as chief executive of the biggest company in the world, he was a man with the heavy weight of expectation on his shoulders. In succeeding his friend and mentor Steve Jobs – an icon who had guided Apple to the top with flair and ingenuity – he knew he was filling very large sneakers.
With the five-year anniversary of Cook’s appointment coming up on 24 August, that weight has now settled more comfortably on his lean frame. But how do analysts rate his performance? On first glance, very well.
The company still dwarfs any rival worldwide by market capitalisation and tops the US in profitability; even in what was seen as a disappointing second quarter this year, it logged revenues of US$50.6 billion in three months.
There are now more than one billion active Apple devices worldwide, one for every seven of us on the planet. In April, Cook increased the dividend for the fourth time in four years.
“Some argue that Cook’s calmer approach may have come at the expense of the innovation forged in Jobs’ creative furnace.”
But that same quarterly result showed a 13 per cent year-on-year drop in revenues, the first such decline in 13 years. Yes, quarterly numbers can be notoriously fickle – part of the drop was due to currency movements, and the biggest reason was that the same quarter last year boasted one-off 40 per cent growth because of the launch of the iPhone 6 – but still there is a sense that the true glory days of Apple might be behind it. Apple didn’t just lead the market, it transformed it on a regular basis. Can it continue to do that under Cook?
“He’s very different to what Apple has had in the past,” says Jeffrey Kvaal, managing director of Nomura Securities in New York. It is, he says, hard to evaluate Cook fairly, because you don’t know what’s coming along behind the scenes.
“He may be more befitting of a company in a more mature industry,” notes Kvaal. “I think it’s fair to say that Apple hasn’t had a breakout new category in a few years.”
Watching the Apple Watch
The iPhone and iPad lines predate Cook. He oversees revamps, reiterations and new marketing strategies around those products, and he approved the jump in screen sizes for 2014’s iPhone 6, which gave the product a new lease of life. Their invention and entry into the market, though, will forever be his predecessor’s accomplishments. So far, Cook’s signature product is the Apple Watch.
On that product, the jury is still out. Cook speaks enthusiastically of how it has “become an increasingly essential part of users’ lives”. In April, a year after its release, he said that “we’ve learned a lot and we believe it has an exciting future ahead”.
Apple doesn’t reveal sales figures for the Apple Watch – Cook simply said “unit sales met expectations”, adding that, like the iPod before it, it will make a huge chunk of its sales in the pre-Christmas December quarter. Analyst guesses of first-year sales are about 12 million units – hardly a disaster but still underwhelming, according to popular opinion. This may be unfair: as Cook points out, sales of the Apple Watch have been better than for the iPhone in its first year.
Figures point to the positive
Perhaps any negativity is simply due to the fact that expectations are so absurdly high of a company that not only sells more than US$500 million worth of product and services and half a million iPhones every day, but routinely redefines the industry as it does so.
Financially, there are great stories at the heart of Apple today: the rollout of iPhones into India, where second-quarter sales were up 56 per cent in a year; the launch of new iPhone versions such as the lower-end SD; the fact that Apple still has 78 per cent of the US market for tablets over US$200. But none of these things sets the pulse racing or convinces as the next must-have thing.
“Those impatient for Apple to reinvent the world on an annual basis simply ignore the reality that iteration on existing tech products is the norm and significant change is the rare exception,” writes John Kirk, analyst at Tech.pinions.
Analysts, who are less romantic about innovation than about numbers, still tend to like Apple a great deal. Citigroup senior analyst Jim Suva, while noting the “Apple outlook is worse than expected”, nevertheless has a buy recommendation on the stock and a price target of US$130. Goldman Sachs analyst Simona Jankowski’s 12-month target is US$155 and Katy Huberty at Morgan Stanley is looking for US$135. Yet at the time of writing, the price was about US$98, having fallen 8 per cent in a night after Apple’s second-quarter earnings announcement in late April.
Even at the more bearish end, nobody seems to dislike it: Macquarie analyst Ben Schachter, who says Apple’s latest guidance statement “will spook the market” and who cut his price target from US$117 to US$112 in April, still rates the stock “outperform”.
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“I’m positive on the stock, that’s for sure,” says Nomura’s Kvaal. “Perhaps it requires a little more work than it once did, but there are still plenty of industries that are ripe for change.”
For example, Kvaal notes that while the Apple Watch “hasn’t done as well as it might have”, its potential is significant. “How many times a day do most people dip into their purse for their phone and wallet? Imagine that stuff being on your wrist instead of in your wallet,” he says. “I speak for myself when I say the parts of my suit that wear out first are the pockets.”
Man of principles
Cook’s time at the top has been in many ways remarkably similar to his more famous predecessor’s tenure. New devices have appeared on schedule; the stock price has, until recently, risen fairly steadily. In truth, the biggest difference between the Cook and Jobs tenures is less about devices and more about attitude, particularly towards the real role of a chief executive.
On that score, Cook has cemented his place with the departure of his biggest internal rival, Scott Forstall, the hard-charging Apple software leader and Jobs protégé who masterminded the iPhone’s iOS operating system. Forstall’s departure was announced just weeks after a controversy broke over the buggy, inaccurate Apple Maps software released with iOS 6. Given Cook’s preference for internal harmony, most analysts believe he forced the more combative Forstall out of the organisation. Long-time chief design officer Jony Ive now heads software interface work as well.
Cook’s tenure has also been peppered with causes and stands, most recently the staunch refusal to assist the FBI in accessing private iPhone data on the handset of a murderer in San Bernadino, California (the FBI gained access in the end anyway). To Cook, this was a matter of principle, with privacy implications that would affect companies well beyond Apple and countries well beyond the US.
The FBI stand was no surprise to those who had watched Cook’s activities over the previous four years, starting with his early decision to make a public tour of Chinese factories in order to head off criticism of the labour standards employed in the production of Apple devices. Cook then committed to work with the global Fair Labor Association to improve standards.
He also hired Lisa Jackson, former head of the US Environmental Protection Agency, to run Apple’s environmental, policy and social programs, one of whose targets has been to make Apple a zero-emissions company.
Then, in 2014, he wrote a column confirming that he is gay, in the hope that doing so would make a contribution to anti-discrimination campaigns. He wrote: “If hearing that the CEO of Apple is gay can help someone struggling to come to terms with who he or she is, or bring comfort to anyone who feels alone, or inspire people to insist on their equality, then it’s worth the trade-off with my own privacy.” In recognition of his support on this issue, last October he won the Human Rights Campaign’s Visibility Award.
“Social issues are becoming a bigger topic,” says Morgan Stanley’s Huberty. “Since Tim Cook took over as CEO, he has slowly become more vocal on social issues. This has been a consistent trend for Apple and somewhat true for the tech industry overall.”
Analysts tend to be somewhat ambivalent about this side of Cook’s management style. Asked about it, Kvaal instead gives a perspective from the investor side. “Most folks in the investor community are cognisant of their fiduciary responsibilities, which do not suggest they take a stand on these issues,” he says.
“If one is investing on behalf of a pension fund, one’s responsibility is to the people who have money in that pension fund. In most cases, investors try to keep their personal politics out of their investment decisions.” Asked if that means Cook, as a CEO, should do the same and stick to management, Kvaal declines to comment.
Some argue that Cook’s calmer and more reasonable approach – being a generally easier person to work with than the notoriously arrogant Jobs, improving labour conditions and so on – may have come at the expense of the innovation forged in Jobs’ creative furnace.
While conceding that the problem “is not that Tim is not a great CEO”, Apple-watching writer Madan Mohan noted recently: “It looks more like a conventional company than the corporate rebel under Steve Jobs … Apple needs a visionary dictator like Jobs to keep pushing people to their absolute limits and making them hit home run after home run.”
Sooner or later, both the market and the public are going to expect something magical, or Apple just won’t be Apple. This is a practical point as much as a visionary one. “We believe that the lack of new ‘must-have’ innovative features will lengthen the upgrade cycle,” says Macquarie’s Schachter.
“If iPhone 7 doesn’t surprise with meaningful new useful features, we worry that consumers won’t upgrade. And unfortunately, nothing that we’ve seen about iPhone 7 thus far strikes us as particularly innovative. Apple will be a show-me story until then, at least on iPhone.”
And beyond iPhone? “The bottom line is that Apple needs innovation, either in its current categories or in entirely new products, in order to drive consumer and investor excitement,” says Schachter. Most analysts don’t think the Apple Watch will drive that excitement. Many, including Schachter, see more potential in the car-related program, dubbed Project Titan, that Apple is known to be funding. An Apple Car, or something like it, would take the company into completely new hardware territory – but no-one knows exactly what Titan will produce.
Noted commentator and former stock analyst Neil Cybart, who now blogs on the company at Above Avalon, has a different take. He argues Wall Street has now declared “broken” the perennial Apple story of exciting new hardware driving ever-rising sales. He believes Apple can tell a new story that goes beyond the excitement of breakthrough devices and instead emphasises Apple’s vast and fantastically loyal user base, 650 million strong and growing.
“Management needs a new way to explain it to Wall Street,” he says.
This, perhaps, is Cook’s biggest challenge for the years ahead: finding a way to add new chapters to a story that otherwise appears to have moved into a more dull and pedestrian phase.
The reassuring news for investors is that he is imbued with self-belief.
“Creating value for shareholders by developing products and services that enrich people’s lives will always be our top priority and the key factor driving capital allocation decisions,” says Cook. “The future of Apple is very bright. Our product pipeline has amazing innovations in store.”
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