What Will It Take For Apple's Stock To Catch Up With The Company?

Jan 28 2014, 8:05pm CST | by

What Will It Take For Apple's Stock To Catch Up With The Company?

Apple—the company—is heading north, as evidenced by its recent quarterly results.

The Company posted record quarterly revenue of $57.6 billion and quarterly net profit of $13.1 billion, or $14.50 per diluted share. These results compare to revenue of $54.5 billion and net profit of $13.1 billion, or $13.81 per diluted share, in the year-ago quarter. Gross margin was 37.9 percent compared to 38.6 percent in the year-ago quarter. International sales accounted for 63 percent of the quarter’s revenue.

The Company sold 51 million iPhones, an all-time quarterly record, compared to 47.8 million in the year-ago quarter. Apple also sold 26 million iPads during the quarter, also an all-time quarterly record, compared to 22.9 million in the year-ago quarter. The Company sold 4.8 million Macs, compared to 4.1 million in the year-ago quarter.

Yet Apple—the stock—is heading south, as evidenced by a sizable decline which followed the announcement of these results.

What can explain this divergence?

New York Times’ Brian X. Chen thinks it is because of slight disappointment in North America in new iPhone sales figures. “Sales of the iPhone shrank slightly in North America, partly because Apple had trouble making enough new phones to keep up with consumer demand,” writes Chen.

Still, that’s a nice problem for Apple to have, as supply will eventually catch up with demand precipitated sales growth.

Wall Street’s DAISUKE WAKABAYASH thinks that the problem is a misguided strategy. “The results highlighted new dynamics and intensifying competition in the smartphone market,” writes Wakabayashi. “Apple continues to target the market for high-end phones, even as demand accelerates for lower-cost models, particularly in emerging markets.”

There is a good reason for the company’s strategy. “Apple is resisting the urge to release a truly low-cost phone that could crimp profitability,” he writes. And undermine the company’s brand, we should add.

Simply put, Apple is facing the conventional “innovator’s dilemma,” as explained by M. C. Christensen. “Successful companies want their resources to be focused on activities that address customers’ needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets,” he writes. “Yet, to expect the process that accomplishes these things also to be something like nurturing disruptive technologies—to focus resources on proposals that customers reject, that offer lower profit, that underperform existing technologies and can only be sold in insignificant markets—is akin to flapping one’s arms with wings strapped to them in an attempt to fly.”

One way Apple could overcome the ‘innovator’s dilemma would be to acquire a low-cost smartphone maker like Xiaomi, as discussed in a previous piece. Such an acquisition would allow Apple to enter the low-cost smartphone market in rural China and Southeast Asia without undermining its brand image– as the smartphone market moves closer to maturity in developed markets.

And it may help Apple’s stock catch up with the company.

Source: Forbes Business

 
 

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