John Paczkowski

Recent Posts by John Paczkowski

Does Apple Really “Need” a New Breakthrough to Bolster Stock?

Gollum-RingIt may be a while before Apple’s shares return to the all-time high of $705 they hit last September, but they should hit $600 or so by year’s end.

This according to Channing Smith, director of equity strategies at Capital Advisors, who predicts that Apple’s stock will rally in the second half of this year, following a potentially tough March quarter, and June guidance that might leave a little bit to be desired. Like a number of other analysts, Smith says Apple is at risk of a near-term earnings miss. But he also says the company’s big picture remains rock solid.

“What we think is going to happen is Apple gets a pass on this quarter and investors are going to start looking towards the summer and the fall, when you start to see new product announcements,” Smith told CNBC. “We’re going to see some excitement over what Apple is going to do something with its cash, that’s our expectation. … We think the focus really goes into the second half of the year, new product announcements, potential announcements with China Mobile and a lower priced iPhone.”

So: Apple’s shares will recover — assuming the company delivers 1) a capital allocation plan that returns a bunch of cash to investors, and 2) another hit product — preferably the next new, new thing. And if the company can develop a lower-cost iPhone for emerging markets where it’s believed to be losing out on growth opportunities, so much the better.

Optimistic argument, pessimistic rationale — well, partially pessimistic, anyway. It’s clearly in Apple’s best interests to do something to appease shareholders pushing for a dividend increase. The Street’s patience on that matter is clearly running short, and if the company doesn’t announce some sort of plan for its cash soon, there could be ugly repercussions. But this idea that Apple “needs” another disruptive product to succeed? That seems both pessimistic and vaguely irrational.

Even with its shares in decline as they are now, Apple is still the most profitable technology company in the world. It sold 47.8 million iPhones, 22.9 million iPads, and 4.1 million Macs last quarter. Sold, not shipped. Apple has sold more than 100 million iPads since it launched the device two and a half years ago. Again, sold, not shipped. And while the company has some formidable competitors in the mobile industry, it continues to outshine them in both revenue and operating profits. According to Canaccord Genuity analyst T. Michael Walkley, last year Apple captured 69 percent of the handset industry’s profits.

69 percent.

Yet if Apple hopes to ever reclaim its glamour stock luster, it supposedly “needs” another industry-transforming product. The fastest-growing PC maker in the world, the company that generated $35.903 billion in operating income from mobile devices in 2012, the company that holds top mind share in virtually every category it plays in “needs” an encore to the iPod, iPhone and iPad. That’s a bizarrely pessimistic outlook to take on Apple, whose fundamental business obviously remains very strong.

Would Apple benefit from a new, breakthrough product? Of course. But will it quickly fade into irrelevance without such a product? Only if you view 47.8 million iPhones sold during the past quarter as hard evidence that buyers’ interest in the the iPhone might be drying up. Only if your definition of irrelevance accounts for that sort of staggering number does Apple really “need” to field another bright, shiny object before its shares see $600 again.
The continued success of Apple’s business is not predicated on announcing something completely unprecedented every year.

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