The short term market was without mercy as AAPL dropped in after-hour trading like they had committed the ultimate financial sin. To a short term trader, perhaps they did. AAPL provided conservative short term guidance. They guided towards $1.00 EPS when they just reached $1.19 this quarter.
Clearly Apple Inc. isn't trying to maximize their short term share price. In fact, I believe they may be doing just the opposite. And I don't mean this in a negative way. I believe there is evidence they are controlling the factors within their reach to maximize the share price in a longer time frame, such as, 3-5 years.
This would make sense given a relatively young management team, with some years to retirement, and products, brand, and intellectual property that is ramping up to say the least. Again, AAPL is not pulling the levers to maximize the share value now, they are building a powerful engine to dominate in their markets in the future...to maximize the share price then, not today.
There are several reasons I believe this:
1) Apple is offering a very generous back to school program. Offering a free iPod, even a touch, with the purchase of a computer for school. They are increasing cost and losing some revenue to build their client base for years to come. Many of these college "kids" will become Apple fans for life...effecting their classmates and family. The time is right with Vista irritation high and OS X offering high user satisfaction. Once with a Mac, and many of these students will never go back to a machine running a MSFT operating system! This is money well spent, and will bring delayed gratification to the company.
2) As mentioned in the conference, Apple is being careful with their profit margins so that competitors can't just come in and offer similar products under Apple’s price level. Apple isn’t eking ever last dollar out of a sale, but they are building and protecting market share. This isn't a short term profit maximization strategy, but a long term building approach.
3) Apple invested in a small, but intellectually advanced chip design company. At this point in time, it doesn't appear there will be a quick payback for this investment, but their may well be a better ability to differentiate their products with custom, proprietary chips. A move that would further distance their iPhone and iPod touch from the competitors and make copying their features more difficult. Again, a longer term strategy, oriented towards market share growth.
4) Apple is recognizing revenue from the iPhone in a 24 month subscription method. This will delay the recognition of revenue and smooth it out. And also delay the taxation of that revenue.
5) Apple is investing in Apple Stores around the world. Stores designed to showcase their products with employees who can explain them to potential buyers. Contrast this to the typical discount department store.
6) App store currently offers many free Apps and only takes 30% of the revenue. This could be increased in the future such that all apps have a minimum price and Apple receives a 35% revenue cut, once it’s well established and the iPhone is in use in the mega-millions. (It’s rather generous now to offer free App hosting and charge nothing for the free ones.)
I believe this longer strategy fits in well with a young management team that is compensated with stock options. Options that are given now and may be exercised in the future when the price is higher. This may be frustrating for a short term investor who always wants the stock at a new high, but for longer term investors, their goals may match up very well with the strategy that AAPL is executing with great skill and expertise.
Short term investors don’t like the EPS guidance for next quarter, but Apple is becoming the leader in PC growth, smart phone user satisfaction, operating system user satisfaction, and providing innovative products to electronic consumers.
Apple isn’t perfect, but many companies would kill to have their faults and their future potential.
Obviously, many investors do not like this approach and sold today. I take a longer view and appreciate what Apple is building both for the user, the long term investor, and themselves. I wish more people took this longer term view to value creation.
Your thoughts are appreciated.
Monday, July 21, 2008
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