Corning (NYSE: GLW ) is like a mirage in the desert. The company is cheap with a P/E of just 8.5, has net cash of $3 billion, continues repurchasing shares and upping its dividend, and has a dominate control of the LCD glass market. Yet in spite of all these positives, as soon as investors see gains on the horizon, they vanish.
The company reported earnings this morning and once again disappointed. While many investors don't yet realize it, the company's tale is the same as other tech giants that have disappointed before it, like Microsoft and Intel. Let's take a deeper look at what's ailing Corning as it slid 10% today. My hunch is it'll need a little magic out of Cupertino to turn things around.
Mo' smartphones, mo' problems
The central problem for Corning is an area it commonly spins as a positive: smartphones and tablets. As Corning sees it, it has much to gain in the space thanks to innovations like its Gorilla Glass, which has taken the tablet and smartphone industry by storm thanks to wins in phones like the iPhone.
On the surface, that's a heck of a catalyst, with smartphone sales exploding to a billion a year by 2015. However, the problem is those smartphones aren't incremental sales to the consumers.
A smartphone sold, a PC not sold, a TV not sold
PC sales were down 8% globally last quarter largely thanks to a consumer shift in spending to mobile. However, the problem runs deeper, as a $600 tablet can also come at the sake of a television. Yes, they're vastly different products, but when consumers make a spending in one discretionary area, it affects all areas around it.
The problem with televisions is that while companies have tried touting advancements like Internet connections, right now we're in a phase where most consumers have an LCD TV and feel little need to upgrade. The software on the TVs is atrocious; the pace of innovation in mobile is just so much higher -- and that presents a problem for Corning. The sales content it gets on a TV with its giant panels is significantly higher than what the company gets from a smartphone or tablet.
Meet your new best frenemy, Corning
In this respect, Apple (Nasdaq: AAPL ) is the company's greatest threat and its best friend. As Apple steals TV sales with selling consumers tablets with one hands, it can give with another.
Its no secret the company is working on a television. It has the right ecosystem of products to make one great, but establishing the right content deals with not only cable operators such as Verizon (NYSE: VZ ) and Comcast (Nasdaq: CMCSA ) but also content companies such as CBS is proving difficult.
The rub is that companies watched Apple essentially suck the profits out of the telecom industry. Before the iPhone, wireless companies such as Verizon and AT&T (NYSE: T ) had previously controlled the interface of smartphones. The result was more control to the wireless companies, but smartphones were awful products and no one bought them. Along came Apple with an extremely compelling product, but the rub was it controlled the user interface and wanted uncompromised control. We all know the end result -- the iPhone becomes such a hit that other carriers have to play by the iPhone's rules and pay the heavy subsidies to sell it. Also, with the iPhone controlling the software layer, applications for getting around expensive services such as texting and calling spread far and wide.
The end result? Apple is now worth nearly double AT&T and Verizon combined. Cable companies took note of this and became terrified of having Apple play out a similar storyline in their industry. Give Apple control of the TV and take another step to becoming a dumb pipe.
What we have here is a stalemate. Apple wants more control of a TV offering, but so far no major cable companies have been willing to budge. What Apple offers is innovation in the industry, the innovation needed to get TVs selling again. A new Apple TV wouldn't only drive its own television sales, but it would also force competitors such as Google and Microsoft -- via the Xbox 360 -- to improve their own home entertainment options to keep up. Google has proved especially clueless in home entertainment, but as we saw with the Android battling the iPhone, it's a company that knows how to "borrow ideas" when something is working. Also, if Apple were able to clear out the legal logjam and get deals signed with content companies, that opens up an opportunity for Google to sign its own deals.
Even if Apple TV was a set-top box, it'd finally spur the refresh cycle, though to a lessened level. Upgrading the actual television is a lot more preferable for Corning's sake.
Yet the point is simple: If Corning wants to get TV volumes soaring again, it needs the kind of innovation that entices consumers to upgrade again. Apple would immediately offer that innovation. TV as we know and interact with it today would change.
Change is good when you want people to upgrade and buy a new television.
Corning's CFO noted on the call the company expects volume growth again next year because "size matters." Maybe he should leave that kind of talk out of an analyst call, because it doesn't. At this point in the television's lifecycle, innovation matters. The TV needs to metamorphosize into something more useful. Corning needs to realize it's riding shotgun on the Apple TV Express, because that's the only thing sitting on the horizon that'll turn around the company's fortunes right now.
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