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Apple's $5 Billion Mistake

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With its stock price down 35% over the past six months, and concerns about a lack of innovation and growing competition, Apple (NASDAQ: AAPL  ) doesn't need the PR nightmare that its new uber campus will likely become. According to an "anonymous insider," who spoke with Businessweek, Steve Jobs' dream of "building the best office building in the world" will become a reality -- for what's estimated to be a staggering $5 billion price tag. The money itself isn't the problem, of course; Apple has that in its petty cash drawer. But the timing of the project? That's another matter altogether.

The new digs
Four months before Apple guru Steve Jobs passed away, he gave a presentation to the Cupertino, CA city council. Along with several architectural renderings, Jobs described what he envisioned as a self-sustaining, four-story circular structure, large enough to house as many as 12,000 employees. With 2.8 million square feet, acres of trees, and imported 40-foot panes of glass, this was never going to be a cheap proposition.

Initially, Jobs and Apple were working with about a $3 billion budget. Now, with projected costs ballooning to $5 billion, Jobs' dream campus would cost about three times that of your typical downtown commercial high-rise building on a per square foot basis. According to the aforementioned "insiders," part of the delay in breaking ground -- Jobs had hoped for a 2012 start date -- lies in Apple CEO Tim Cook and his team's attempts to shave $1 billion in costs.

Cook's found himself between a rock and a hard place. Altering Jobs' vision for the new campus would enrage Apple fans, who still revere Jobs as an iconic, larger-than-life figure. But proceeding with a $5 billion project when shareholders are sitting on massive losses, and big hitters like David Einhorn are screaming for Apple to share some of its $137 billion in cash, has the makings of a publicity disaster.

What should really concern investors
As competitors across the mobile space have continued rolling out new designs that have narrowed -- or in some investor's views, surpassed -- Cupertino's offerings, Apple investors are left waiting for something --  anything -- they can sink their teeth into. There's no arguing with Apple's profitability, or its strong financials, but its product introduction cycle, historically a little over 300 days for the iPad line, needs to tighten up. By comparison, Samsung and Nokia  (NYSE: NOK  ) seem to have a new smartphone coming out weekly.

As for Microsoft  (NASDAQ: MSFT  ) and Google (NASDAQ: GOOGL  ) , both have entered the mobile hardware side of the market, but neither are hamstrung by having to build their own devices to expand offerings as Apple is with its iOS, so bringing the "next great thing" to market takes nothing more than an OS licensing deal. Microsoft recently released its own Surface Pro and, while it's expensive, hopes are high. Microsoft's RT tablet is another story, as poor sales by its RT partners have some discounting RT by as much as $220. Google's expected to roll out the next generation of its Nexus 7 in July, directly targeting Apple's iPad mini market. With Google Glass, white space wireless connectivity testing, and its Fiber Internet service, Google is always willing to push the envelope, something Apple bears suggest it has fallen behind on.

Nokia, especially now that it's jumped on the Windows 8 bandwagon, is able to introduce new smartphones at an incredible rate; four during late February's Mobile World Congress alone. Nokia has a long way to go before it starts making Cook nervous, but Apple -- which only treads in the high-end smartphone space with its costly iPhone -- is limiting its revenue opportunities in emerging markets.

With each new Nokia or Samsung phone, or Google or Microsoft OS tablet, the mobile battlefield gets more competitive, and a new Apple campus isn't going to help calm investor fears. Apple has never been a company with an expansive product line-up, and that's been a key advantage to the company. However, in a PC market where its market share sat in the single digits, demands were different. The pace of mobile innovation is extremely fast, and when you have up to 80% of market share in certain carriers like AT&T in launch quarters, retaining such high market share could mean that faster launch cycles, or offering a wider variety of phones (via different prices or screen sizes) could become a must to sustain growth. 

Without a new, leading-edge iDevice introduction soon, things are likely to get worse for Apple before they get better, and that's what Apple investors should focus on. Unfortunately, Apple's learned the hard way that perception matters to investors, and its extravagant, multi-billion dollar campus is sending the wrong message at the wrong time. 

There's no doubt that Apple is at the center of technology's largest revolution ever; however, there is a debate whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (25) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 05, 2013, at 11:47 PM, Drew9944 wrote:

    Cook should cut it back to $3 billion original plan. Do normal concrete poured ceilings, not make them on the floor and lift, and not make for 1/32" lines between the big ceiling or floor polished terazzo tiles. 1/32" gap requires too much precision, this is not a small iPHONE but huge building. No-one can see the difference between 1/8" and 1/16" and 1/32" from normal distances if very high ceilings. Problem with making things with too small gaps, is when temperature extremes happen once every 100 years when the electric power goes off on A/C or whatever (during some earthquake), then the concrete or terraazo tiles will crack if they expand too much. Apple is not the Government, they should not be wasting money making a precision panels building with fit and finish better than an art gallery's finest spaces. It adds nothing to their ability to design and develop better products, nor their employees' productivity. Even the UN headquarters in NY, is nowhere near as nice.

  • Report this Comment On April 05, 2013, at 11:52 PM, G44ca wrote:

    The building and the timing of the building is not a mistake. Apple's needs dictate now is the time for the building. The reporting of it being a mistake is the only mistake I see. By the time the building is completed in a few years the recent drop in Apple stock price will be a thing of the past and nearly everyone that matters will be raving about the newest and greatest building in California. The press coverage alone will probably be worth a billion dollars to Apple.

  • Report this Comment On April 06, 2013, at 12:15 AM, G44ca wrote:

    One would think that after Apple rapidly became the most highly valued company on the planet by following a mission of producing the best possible products with the best materials that people would UNDERSTAND that mission was worth following.

  • Report this Comment On April 06, 2013, at 12:23 AM, tkell31 wrote:

    Five billion dollar building, one billion dollar benefit...yeah, that's good business. Increase the dividend and then they can do whatever they want.

  • Report this Comment On April 06, 2013, at 12:49 AM, IraLA wrote:

    Just do it.

  • Report this Comment On April 06, 2013, at 1:05 AM, peto3 wrote:

    Tim, you're a -- freak'n -- idiot ...

  • Report this Comment On April 06, 2013, at 1:31 AM, applefan1 wrote:

    In response to Drew9944. Are you one of the principal architects on this project? If not, then what you are saying doesn't make much sense.

    When a design on a building states a specific measurement, if it is altered, it has to make sure it will hold up structurally to whatever earthquake tests, etc.

    Projects are usually done by estimates, but depending on if there are any time frame changes to speed up a project CAN increase the cost of construction. Most building projects don't come within the original estimates. If they do, they are lucky.

    Obviously, this is in an area with higher labor costs than in other places and they are also wanting to use custom glass that is VERY expensive to mfg and transport.

    They can do whatever they want to since they have the money and money flows into their bank account every quarter.

  • Report this Comment On April 06, 2013, at 2:18 AM, bobyk3 wrote:

    5 billion is incorrectly timed and extravagant. A larger size iPhone and a less expensive iPhone are the need of the hour, not a 5 billion building.

  • Report this Comment On April 06, 2013, at 3:05 AM, amaradio wrote:

    The biggest internet mistake is allowing a website like The Motley Fool to continue writing meaningless articles. I generally get a paragraph or three into an article and realize that The Motley Fool is nothing but a follower to the share price of a stock. They write bad stuff when the stock is doing bad and good stuff when the stock is doing good; that's like waiting for it to rain then saying it's raining. You're website is pathetic, your authors are losers, and not there is a good chance my comment won't make it due to a 15 minute delay or the time it takes one of your editors to read a two sentence comment. Do you really need 15 minutes to read my comment? When Apple was making all sorts of money, no one cared less that they were building a building. Now that these so called "analysts" in New York, whom are wrong 99.9% of the time, are bashing the stock and the share price has dropped, suddenly this is the wrong move. You do you realize that Apple will probably have $150B in cash by April 23rd? I surely think they can spend money on a new building; they damn sure have earned it. So Motley Tool, you will be seeing my name a lot now to start countering your poorly written articles. Love, Joseph.

  • Report this Comment On April 06, 2013, at 3:48 AM, H3D wrote:

    Unclear whether your reporting news, or trying to bring it about!

  • Report this Comment On April 06, 2013, at 4:17 AM, McShabadoo wrote:

    PC dying? Yeah, right, I wouldn't call the PC community "dying" after Star Citizen raised nearly 9 million dollars from players alone. Phones and mobile devices are an absolute joke for graphics, and as long as PC is the main leader in graphics hardware (which it always will be) then many gamers will still be using one.

  • Report this Comment On April 06, 2013, at 4:31 AM, Intuos wrote:

    Completely stupid idea! If they had any brains they would move OUT of the job killing California - not build a X billion dollar mother ship. I buy Mac computers because of what I can do with them, not because of some idiot building. Remember the Sears headquarters. Sears was still the top retailer and thought they need not listen to anyone so why not build a large headquarters to show off their might. So where are they now? Bought by a bankrupt K-Mart. Steve lost the computer market once before people seem to forget. By the late 1990s they were nearly bankrupt and were forced to take a nearly $1 billion investment form Microsoft - who in exchange got to to license Apple technology, such as drag and drop, in windows to make it more like the Mac OS. The last Intel Mac I bought did not even come with an OS disk to reinstall it - they expect you to fix your system over the internet instead - all to save $1.00 or less per computer on the price of a CD.

  • Report this Comment On April 06, 2013, at 6:22 AM, wrevansii wrote:

    You Apple weenies are always trying to out verbalize each other. Fact. Shareholders are all that matters. Without investment, there is no Apple. No corporation can sustain itself without cash flow. Jobs may have had a great vision here, but since his passing things have change greatly.

  • Report this Comment On April 06, 2013, at 7:19 AM, Drew9944 wrote:

    Apple's having designed the world's most expensive office building per square foot, which is now subject to over-runs, adds nothing to the Bottom Line of the business. Sure they needed a new office building for their growing company for 10,000 employees to work in one location. Sure their innovative modernistic architecturally dramatic design is great. But you don't add huge costs by specifying the building to 1/32" tolerances which don't make a difference in constructing real estate. In fact such close tolerances of hard materials like huge glass or concrete panels, in an earthquake or temperature extreme causing material expansion once every 100 years, could lead to massive cracks. The purpose of a building is a place where employees can work and be productive, not to be like a fancy art museum, and not to be a huge Mausoleum to Steve Jobs. If that's what's wanted, Mrs. Jobs has $X Billion of Apple Shares she can cash in to pay for that.

  • Report this Comment On April 06, 2013, at 8:45 AM, Jjkiam wrote:

    I believe the revision of the building to a more reasonable 4 billion (:-)) is the only decision to make.

    The company no longer either needs to or should consider "what Steve wanted". 1/32 tolerances are a ridiculous and wasteful standard to impose on a structure this large. As to all the other repetitive garbage about Apple's ability to innovate or product refresh flexibility, don't you get tired of endlessly repeating the same baseless speculation? Apple just refreshed more products in the last qtr of 12 than ever before.

  • Report this Comment On April 06, 2013, at 8:48 AM, lkmd2016 wrote:

    If they build it, they will come.....

    Lets build things in the USA and quit arguing about it!

    Jobs is the number one priority.

  • Report this Comment On April 06, 2013, at 9:13 AM, aliikane1000 wrote:

    Tim Cook has got a ton on his plate. Not sure how he gets any sleep. Apple may be slow to release new products in product line due to so much focus is on the new campus.

    I disagree with David Einhorn that a higher dividend is the answer. Apple is down 40% since its high and small dividend is not gonna make up for that drop. Apple should use the money for research and product development. The potential upside for the company to dominate again and stock price to increase to previous levels and higher far outweighs a small dividend.

  • Report this Comment On April 06, 2013, at 9:29 AM, Beauregard111 wrote:

    What happened to Apple innovation (insert reply below haha)?

    Apple is quickly sliding backwards in tech offerings. They used to lead the pack with innovative ideas, etc, but now they just pump out products. There last couple iPhones are basically similar. Certain iOS apps leave a lot to be desired (messaging for one).

    I'm an Apple Fanboy, but I haven't been excited about ANYTHING from them for a couple of years. The rest of the population is sure to feel the same way. At this point, the best thing about my Apple products are the re-sale value; and that's sad.

  • Report this Comment On April 06, 2013, at 10:19 AM, Michelinanana wrote:

    Can anyone explain to me about about this thing people say about building the tallest skyscrapers and the economic cycle in the following article?

  • Report this Comment On April 06, 2013, at 2:58 PM, smv7519 wrote:

    What did apple invent. I know they stole ideas. They didnt invent tablet or phone or music player. What did they invent thunderbolt port. You suckers. They cant get nothing right. their mac sucks and ipads and phones. What did apple invent.

  • Report this Comment On April 06, 2013, at 3:44 PM, PaulApp wrote:

    As I said before and I will say it again... When a company builds their MEGA headquarter their company will start going down the drain!

  • Report this Comment On April 06, 2013, at 4:30 PM, Rosenwald wrote:

    I wonder how many folks were put to work by going ahead with the project?

  • Report this Comment On April 06, 2013, at 4:32 PM, Rosenwald wrote:

    I love rich folks...someone has to build the aircraft, the limos, the boats, the 5 billion dollar the rest of us have jobs.

    Take away the "rich" and everyone is POOR

  • Report this Comment On April 12, 2013, at 4:14 PM, WineHouse wrote:

    Tim -- first of all, the Microsoft Windows 8 rollout is a bust. People ain't buying it! First of all, the entire idea on which Windows 8 is based is a rip-off of Apple's iOS/OSX integrated computing environment (just as it's original "Windows" was a rip-off of the old MacIntosh operating system). The problem with the original Windows, and all the subsequent Windows variants until now, was that it was overlaid on top of DOS and as a result it was cumbersome. It required continual patching and updates, and every patch and every update did a number on the registries. After a while, you felt you had to buy a new machine and new MS operating system just to have a fast, clean workspace. Now, from what I understand, Windows 8 was built from scratch and so it's not as much of a memory hog as prior overlay versions of Windows. But the "newness" of the look-and-feel of W-8 is downright strange and odd for those who are not familiar with OSX, and requires a steep learning curve that most people don't want to go through. It would be a snap for folks who are already using OSX, but why on earth would they want to switch? So I think that the market for those people who really still want PC's (instead of switching totally to tablets because they don't really make full use of the PC to begin with) will shift to OSX (i.e., Apple computers). Most people frankly don't make full use of their computers, and for their purposes, tablets are adequate. You can do email and web-surfing and social networking and simple document creation perfectly well on a tablet. For heavy-duty computer users, the advantages of the OSX operating systems and the iMacs and MacBooks will eventually become perfectly clear to those who don't already know from experience. Those people will want to continue to use Apple mobile products (tablets, phones, pods) because of the compatibility with their computers.

    Look, the Apple products have always been a "luxury" line -- they're not for everyone. Why spend that kind of money if you're not going to make full use of the product or fully appreciate what it has to offer? After all, not every woman is going to wear Givenchy suits, and not every man is going to drive a Porsche, but that doesn't mean that Givenchy or Porsche are going to go out of business tomorrow.

    After a computing lifetime of Microsoft Windows products, I made the switch to a MacBook Pro this past summer. It took a little getting used to the new way of thinking that's required to use the Mac. But now that I'm "into" it, I can't believe I waited this long.

    And BTW, I'm "long" all three -- AAPL, MSFT, and GOOG. GOOG is pure cap-gains speculation, since it doesn't pay a dividend, but I think its R&D team is creative and it's got a good future, at least for the next five or six years. I'm still slightly ahead on MSFT but am worried that it won't be able to recover from its huge investment in Windows 8 and will not only drop in market price but also cut its dividend. And as for AAPL -- you're only in the red with AAPL if you were dumb enough to buy at 700, which was obviously a ridiculous valuation. If you bought at 350, and held, you are getting 2.4% dividend yield and looking at long-term profitability; what's not to like? You wanna double your money in three months, I've got a bridge to sell you.

  • Report this Comment On April 12, 2013, at 9:32 PM, brisbanebill100 wrote:

    One of Parkinson’s Laws - says that whenever an organisation moves into a new, custom-built headquarters, it is likely to be not just heading for disaster but already there.

    This Parkinson’s Law of Custom Built Head Offices alludes to the way that the process, first of deciding about the new building and then of getting settled into it, takes the attention of the people who matter away from the real job that they are supposed to be doing, and towards their own, as it were, domestic arrangements. They are celebrating past successes instead of contriving further success.

    I have used this as a marker, with total success, to sell up and move on over the years.

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