What Apple (AAPL) can Learn From the Market Mayhem in Its Stock

In my last post, I looked at the options that investors in Apple (AAPL) face today. In this one, I hope to look at what Apple can learn from the market mayhem in its stock, and, in the process, adapt. As an Apple stockholder now, I am at least partly motivated by self interest, but I am also a long time Apple product user and I would like to see the company on steadier footing. So, here are some general suggestions that I would have for Apple management (though I am sure that they are much too busy tending to day-to-day business to be reading blog posts):

  1. Build up credibility with investors: The company has to regain credibility with investors. Apple has acquired a reputation for lowballing its expected results, prior to earnings reports. Instead of making it easier for the company to beat expectations, it has led instead to markets paying little heed to the guidance. In fact, it looks like Apple is taking the first step towards doing this by adopting the Amazon strategy of giving wide bands of forecasts for expected earnings. There will be traders/analysts/investors who will be upset, and may abandon the stock. Good!!!
  2. Be transparent: Become more open about long-term strategy and products. I think that Apple’s secrecy about new products and strategies may be a great marketing strategy but it creates an information vacuum, which is filled with rumors and fantasy. I know that Apple also worries about giving away information to its competitors, but when you are a company the size of Apple, the news will get out to your competitors any way. So, stop acting like you are protecting national security and start acting like a business!!
  3. Take a stand: The company has to stop trying to be all things to all investors and make its stand on whether it sees itself more as a growth company or a more mature company. Picking one does not mean that the company is giving up on the other, since a mature company can still pursues growth prospects, but it does lay down markers that will determine your investor base.
  4. Behave consistently with your choice: Once Apple makes its stand as a growth or mature company, it has to behave consistently. Thus, if it decides that it is a mature company, it should return more cash to its stockholders, though I think stock buybacks make more sense to its stockholder base now than dividends do. At the moment, with its huge cash balance, it clearly does not make any sense for Apple to borrow money, but somewhere down the road, it has to consider the debt option, since not using it is depriving itself of the tax benefits embedded in the tax code for using debt instead of equity.

I know… I know… All of this will make Apple a more boring company, but I do have one avenue that the company should explore that can still provide excitement to investors, while also creating value. Apple’s great successes in the last decade have come from “creative destruction”, where it has gone into established markets with game changers – retailing with iTunes and Apple stores, portable music players with the iPod, the cell phone market with the iPhone and the tablet market with the iPad. Its success in each of these markets has made it a large player in each of them, which is a problem. As Clayton Christensen, Harvard’s strategy guru, notes, it is difficult for established players to be “disruptive innovators” because they have too much to lose, and Apple can no longer afford to be revolutionary in any of its existing markets. It has two choices. It can put its youthful, creative destruction ways behind in and grow up, or it can go for creative destruction in new markets. I think it should try for a combination, playing defense in the smartphone and tablet markets, and using its competitive advantages to crack open new markets. Unlike Samsung or Microsoft, Apple has never been just a technology company. Its strength has always come from a unique mix of design (software & hardware), elegance and efficiency, and it is this combination that has given it pricing power.

So, where should Apple look next? I would suggest looking for businesses where existing companies churn out poorly designed and consumer-unfriendly products, but are trapped by a lack of imagination and legacy choices into continuing down that path. I can think of at least a dozen that I use or interact with on a day-to-day basis. While televisions have been bandied about as the next big Apple market, I don’t see why the business has to be electronic. I am sure that my airline experience would be better on Apple Air, my hotel stay more comfortable at Apple Hotels and my tax money better spent with Apple Government.

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About Aswath Damodaran 56 Articles

Affiliation: New York University

Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University. He teaches the corporate finance and valuation courses in the MBA program as well as occasional short-term classes around the world on both topics.

Professor Damodaran received his MBA and Ph.D degrees from the University of California at Los Angeles. His research interests lie in valuation, portfolio management and applied corporate finance.

He has written four books on equity valuation (Damodaran on Valuation, Investment Valuation, The Dark Side of Valuation, The Little Book of Valuation) and two on corporate finance (Corporate Finance: Theory and Practice, Applied Corporate Finance: A User’s Manual). He also co-edited a book on investment management with Peter Bernstein (Investment Management) and has two books on portfolio management - one on investment philosophies (Investment Philosophies) and one titled Investment Fables. He also has a book, titled Strategic Risk Taking, which is an exploration of how we think about risk and the implications for risk management.

Visit: Aswath Damodaran's Page, Musings on Markets

1 Comment on What Apple (AAPL) can Learn From the Market Mayhem in Its Stock

  1. I have an idea, how about stop trying to sue everyone and rebuild your reputation with the people who used to want to buy your products, at the moment i personally refuse to buy any apple product ever again, so stop suing everyone and make it look like you are a decent company to deal with

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