How Apple invites facile analysis

Conjecture and misunderstanding can trump actual knowledge when it comes to evaluating a company; the hubbub surrounding Apple is a case study.

For those of us not directly invested in Apple, the stock's trajectory over the last six months has been a thrill ride to rival anything you'll find at Magic Mountain.

Since hitting an all-time peak of $705 in mid-September, the shares have been on a long slide, reaching $419 before recovering a bit to almost $462 last week. At the peak, learned Wall Street analysts were speculating about how high Apple could go and whether the sky really was the limit; at the current trough, they're all but proclaiming the end of the Apple era.

Here are the questions on everyone's lips: Who's right? And where does it go from here?

And here are the answers: I don't know. You don't know. Nobody on CNBC knows. And if they try to tell you they do know, run for the hills with your hand on your wallet.

What we can say, however, is that the sentiment and stock action related to Apple offer a perfect study in how conjecture and misunderstanding can trump actual knowledge when it comes to evaluating a company. When the company is as much the focus of worldwide attention and as uncommunicative about its own plans as Apple, the effect is even sharper.

The peculiar stock market action and the vacuum in information have combined to generate a wave of news articles and market reports suggesting that Apple has lost its zip and is running as fast as it can just to keep up with Samsung, the maker of its own line of popular smartphones. Yet the notion that Apple is "ceding its crown" (Reuters' words) in smartphones to Samsung or anyone else, however, is wrong or, at the very least, hopelessly premature.

I should stop here to declare my interests. I don't own Apple shares. My household is 100% Mac, including three MacBook Airs, but we're atypical Apple customers. None of our four smartphones is an iPhone. We don't own iPads or any other tablets (Kindles don't count); I'm still waiting for Apple to make the case that I need one. I've written about Apple in all its various incarnations since 1995. In that time I've read a lot of valid reporting about Apple, and a lot of hooey. The hooey usually gets more widely circulated.

A few notable points should be kept in mind when pondering Apple's stock market behavior. One is that the slide in its shares coincided with a period in which it became the most profitable company in the United States, and by no small margin. In the last quarter of 2012, Apple racked up more than $13 billion in net income. The next two names on the list were ExxonMobil and Chevron, oil companies that rise and fall with the price of crude. To find another industrial company you had to go to No. 4: Microsoft, which reported profit less than half of Apple's.

Over the longer haul, Apple's profit growth has been stupendous. In 2009 its bottom line was $5.7 billion, the following year $14 billion, and in 2011 it was $26 billion. You won't find a company Apple's size with a trajectory anything like that. Until the September 2012 stock peak, profit growth and the stock price moved in parallel, although profits grew rather faster than the shares.

Yet it's fair to say that on the way to the peak as well as to the trough, the punditry — indeed, even the purportedly "factual" reporting on Apple — has been little more than myth-making. Financial commentators need stories to tell or their audiences get jaded. The prevailing yarn about Apple through mid-September 2012 was that it was a juggernaut. Could do no wrong. Would eventually grow to consume the entire Earth and everything on it. Yet even stories of world domination begin to pale after time, so this one was duly succeeded by another: Apple knocked off its perch. Its best days were visible only in a rear-view mirror. No longer "cool."

One persistent variety of magical thinking confuses the real Steve Jobs with the haloed version that exists, if anywhere, only in Ashton Kutcher's publicity file. It's fashionable to think of Jobs as a visionary executive with an invariably "laser-like" focus on the user experience, who was never wrong, who would never have deigned to pick fights with Apple's lowly rivals, etc., etc.

The subtext of all these assertions is that Jobs' successor, Tim Cook, has done all these things so he must be failing. Myth-making requires a short memory: All these assertions about Jobs, and many more invoked as a reproach to Apple's present-day regime, are demonstrably wrong.

The main focus of the latest crop of facile but questionable Apple analyses is on the rise of Samsung, which last year shipped 216 million smartphones, including its high-end Galaxy models, compared with Apple's sales of only 136 million Apple iPhones. (The figures are from IDC Worldwide.) In the same vein, Google's Android operating system, which powers the Galaxy phones, widened its lead in market share over iPhone, capturing nearly 70% of the smartphone market in the fourth quarter of last year, according to the Gartner Group, compared with Apple's 21%.

A key error here is the notion that a Samsung or Android user is the equivalent of an iPhone user. The latter are willing to pay more for their phones and use them far more vigorously than the former. They buy more apps and spend more time with them. Market analysts figure that the iPhone, despite being outsold, generates roughly 70% of all operating profit in the mobile device industry, Samsung's devices almost all the rest.

This imbalance confuses pundits. "Rather than see Apple as being in a strong position, and being very good at what it does, a lot of people look at these numbers and think Apple's just had fluke good luck," John Gruber, a technologist and former software developer who blogs about Apple at his website daringfireball.net, told me by email.

Of course it's possible that the discrepancy in market share between Samsung/Android and Apple will soon bear fruit for the former — developers will write more apps and users will use them. But Apple has an advantage in bringing out innovative new products that won't go away soon: It controls much more of its own technology than Samsung or Google.

"A technology breakthrough, to be commercially viable, has to be integrated in a very complex way," says Horace Dediu, a former analyst for the mobile phone company Nokia who now runs his own industry analysis firm, Asymco. "All companies have the same approach, but Apple is the only company on the planet that can fit all the pieces together" — software, hardware, apps, content, you name it. Samsung can manufacture a phone, but it needs Google to run it. (And last year Google bought its own hardware company, Motorola.)

Dediu observes that Apple does have to run harder to compete today than it did when it introduced the iPhone in 2007. Its rivals are getting faster and better at bringing out popular competing products — the market was swamped with rival tablets within months of the iPad's introduction. Android will attract more and better apps. A cheaper iPhone may be needed to keep Samsung from monopolizing the mid-price and low end of the smartphone market. An Apple that stands still isn't in the cards.

And it won't be long now before the myth-makers in the press and on Wall Street shift gears again. They're already stirring up speculation about Apple's next big thing — a smartwatch? The long-awaited Apple TV? A wearable computer a la Google's glasses?

These conjectures always sound bloodless, because none of them can answer the question posed by the late social critic Neil Postman about any bruited technology "breakthrough": "What is the problem to which this is a solution?" After all, what's wrong with TV as we use it today? With our wristwatches? With our eyeglasses? Until we know, there's no basis for claiming that any of these "solutions" will be life changing. (Most aren't.) But the fact that the pundits are on tenterhooks wondering what Apple's version of any of them will be tells you that, while Apple may cede its crown someday as the premier marketer of consumer technology, that day hasn't yet dawned.

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.

Connect
Advertisement

VIDEO

ASK LAZ