Don't Blame Tim Cook for Apple's Fall

Most of the time, the CEO has to answer for a company's cratering stock price. Investors clamor for accountability when things go bad, and typically a stock's decline is the direct result of a deteriorating business. Dropping share prices should usually be commensurate with aforementioned fundamental deterioration, if there is any. That's not always the case, though.

Back in 2011, when Netflix (NASDAQ: NFLX  ) cratered from $300 to $60 over the span of four months, investors called for Reed Hastings' head. Much of that drop was tied to the Qwikster debacle and associated 60% subscription price hike, but shares have recovered since then. Hastings has regained investor confidence primarily by focusing where it matters: domestic paid streaming subscribers were up 26% and international paid streaming subscribers soared 238% last year. It's all water under the bridge now.

That's why investors should stop trying to blame Tim Cook for Apple's (NASDAQ: AAPL  ) fall.

The fall guy
Over the weekend, Forbes contributor Gene Marcial posted an article that's been making the rounds today speculating that Apple is currently looking for a replacement CEO, citing "[s]ome Wall Street sources close to some Apple executives."

Marcial also said that some large investors "assert privately that it's time for Apple to oust Cook, under whose tenure Apple's stock has lost about half of its market value since October 2011, when he took over as CEO." The latter part of statement is inaccurate on two levels: Shares are still up marginally from when he became CEO in August 2011 (this inaccuracy has since been acknowledged and removed by Forbes editorial).

AAPL Chart

AAPL data by YCharts.

What's entirely true is that shares have given up nearly all of the envious gains that they had previously enjoyed under Cook's leadership. However, amid a gut-wrenching decline and the search for answers, investors are losing sight of how to really assess Cook's performance as Apple's CEO.

Cook has delivered numerous records for shareholders. Both holiday quarters that he has presided over set all-time highs for all of Apple's most relevant performance metrics (other than share price).

In nearly every quarter, Cook has put up iPhone unit sales higher than anything Apple ever reported under Steve Jobs. iPad units under Cook have also soared to levels unseen under Jobs.

Source: SEC filings. Calendar quarters shown.

Revenue and net income have similarly skyrocketed during Cook's tenure, as a testament that he can indeed put up results where it counts.

Source: SEC filings. Calendar quarters shown.

Last quarter was quite literally the strongest quarter Apple has ever posted in terms of revenue, net income, and unit volumes for the iPhone and iPad, even if it wasn't enough for investors.

Scrooge McCook
Other critics have cited Cook's seemingly hesitant attitude toward increasing Apple's dividend as a reason he has to go. Apple's cash hoard continues to swell and Cook continues to give little more than vague assurances that Apple is in "very active" talks about cash options.

It's entirely true that Apple needs to give more back to improve its capital allocation policies, but remember that Cook is the only reason why investors are getting a dividend in the first place. It was very clear that Jobs was quite content with growing Apple's cash position to infinity, and had no interest whatsoever in returning cash to shareholders.

In the grand scheme of things, Apple's current dividend has been in place for less than a year, and most companies tend to stick to an annual dividend cycle. Apple's being held to a different standard due to its declining share price and soaring cash position. Under other circumstances, investors would have more patience while they await the inevitable dividend boost announcement.

Cook thinks different
If investors were truly this disappointed with Cook, they wouldn't have given him a 99.1% investor approval rating at Apple's annual meeting in February. There have been no official developments in the past two months (even as the Apple rumor mill does its daily thing), so there's no reason for investor approval to change much from then.

None of the above comparisons to Steve Jobs are intended to suggest Cook is better than Jobs overall as a CEO; Cook is just different. Rather, investors need to refocus on the company's fundamentals over the share price when assessing CEO quality. In those aspects, Cook has performed admirably.

It's not Cook's fault that there's been a distinct disconnect between Apple's share price and Apple's fundamentals, since its prices are entirely dominated by emotion in the current environment. There are some legitimate headwinds that Apple faces in its core businesses, but those challenges hardly warrant a nearly $300 billion loss in market cap.

Instead of blaming Cook for Apple's fall, investors should blame their fellow investors for losing confidence in a company at the top of its game.

Is Apple truly still at the top of its game? That's a question investors are contemplating right now, and a question that The Motley Fool hopes to answer in our new premium research service all about Apple. Eric Bleeker, CFA, and I dig in to numerous aspects surrounding Apple's business in a comprehensive set of reports that you can get access to by clicking here.


Read/Post Comments (18) | Recommend This Article (23)

Comments from our Foolish Readers

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  • Report this Comment On April 22, 2013, at 9:10 PM, NewAlchemist wrote:

    It's a tough act to follow for Cook. No matter what people are going to dog him for not being Jobs.

  • Report this Comment On April 22, 2013, at 9:17 PM, DanManners wrote:

    I understand your argument and I respect your view. I agree that Cook shares the blame. But he has done things that shareholders think are wrong and I will list them and explain why I believe it is Tim Cooks faults.

    1. Everyone differs in opinion that Apple needs a larger phone. Everyone in Asia seems to love them. Analyst Nick Nansen wrote of his trip to China last year and how larger phones were a must for Apple. Today one analyst on CNBC said that was a big issue. Why can't you have two phones with 2 sizes? Samsung has over 60 different phones. Cook said we have the right size. So all those people that want a larger phone and are paying for the Galaxy S3 /4 might buy iphones if they had a larger phone.

    2. China Mobile deal. Why has this taken so long? Other companies have made deals with China Mobile. I understand there system is not compatible but Apple needs to make that issue go away.

    3. NO dividend or buyback increase over one year later. For the Lords sake you have 150 billion (assuming they made cash this qtr) and you waited this long as the stock crashes.

    4. Nothing done for 8 months now. If earnings are bad tomorrow and for the June qtr we enter another qtr of dropping share price in the Sep qtr. That is what one analyst wrote today. By then we could be below 300. Unless a floor in the stock happens, the daily bad news will hammer the price.

    5. One analyst said Apple is a battleship that is being fired on but yet has fired back. We now have the Galaxy 4s being released. Not a bad phone at all and if it steals mkt share then that could tank Apple more.

    I could go on but you had enough. By the time Apple does something we could be much lower. Hopefully positive things happen tomorrow. I think they could announce a div/buyback increase to offset negative sentiment on earnings. Who knows for sure? We will see.

  • Report this Comment On April 22, 2013, at 9:21 PM, dwilh51183 wrote:

    Quit making excuses for TIM COOK. He is the leader of this company and it's his responsibility to stay on top of things to make sure AAPL makes cheaper iPhones out there for underdeveloped nations for people to buy. it's his responsibility to change the clause that Apple has dis-allowing OTHER PEOPLES IDEAS AND PATENTS TO BE DEVELOPED INTO GREAT PRODUCTS. there should be no excuses for not having three or four cheaper iPhones for underdeveloped countries. And what's taking so long to sign China Mobile and Japan's DoComo Tim Cook needs to be a man of his word. He promised shareholders he was going to buyback $10 billion worth of stock and he only bought back 2.5 billion. he let AAPL stock get hammered when he could have bought back 150 billion worth, by getting a low-cost loan at 2%.

  • Report this Comment On April 22, 2013, at 9:44 PM, lakawak wrote:

    This is the kind of stupidity you expect from commenters, not the actual article. Who cares that Cook took over in August 2011. He had NOTHING to do with the stock price in September, October, November, even December of 2011. Probably even longer.

    Two things spell doom for Apple. 1. Apple has never been successful without Steve Jobs. and 2. Apple has never been successful in a mature market.

  • Report this Comment On April 22, 2013, at 9:59 PM, stustanton wrote:

    The trouble at Apple is, I think, that the company was structured from top to bottom as the disruptive technology company that thought and acted at every position like Steve Jobs. Managers and workers everywhere were selected for that skill ste. Now they are suddenly asked to act like traditional business managers and thus act like, well, themselves. Two problems: First, what is generally thought of as competent business practices are usually lethal within a disruptive company, but second, to a person, people were not selected for their post for that skill; their skill sets no longer fit. I suspect that what Apple needs is a single person at the top who does their best to act like Steve Jobs, the dictator, and then let the skill set below them do what they were selected to do, and do what SJ would do. It's that or quit the DT business.

  • Report this Comment On April 22, 2013, at 10:17 PM, TimMcManus wrote:

    You folks need to be more creative in your listening to the company and what it's doing.

    They said margin was going to go down, and it has. Why? Let's use something easy everyone can follow: Willy Wonka and the Chocolate factory. Why did Willy Wonka close his chocolate factory? Because other candy manufacturers came in and stole his ideas. So he closed his factory and got a bunch of Oompa Loompas to work for him.

    Every other manufacturer is riding on Apple's success right now, and Apple is restructuring their supply chain as a result. I believe that Apple will still order parts in the East, but they're going to assemble them in the states, possibly in their own factories. It makes it easier to patent and protect manufacturing this way. And, it costs billions of dollars to do your own fabrication. Apple is going to close it's relationships with certain factories and hire its own Oompa Loompas to protect its intellectual property. Because Apple decides to disrupt another market, it will do a much better job of protecting and patenting their intellectual properties.

    Apple learns hard lessons as a company. There is a very good reason why it does not have several lines for it's products but prefers to have just a few. It has nothing to do with cannibalization, but it's a more complex reason. When Jobs came back to Apple he threw out the dozen or so computer models they had. He told his team to reduce it to four models, that's it. It simplified production, inventory and supply chain issues. That is the magic behind the giant margin Apple makes on its products; the cost less to produce than the competition.

    Having only a few models is great for developers. Screen sizes, resolutions, and every other concern a developer has becomes less of an issue. Many people forget this. Developers need to take into consideration the incredible and vast differences in configurations when they're developing software for a device. Remember dealing with driver issues in Windows? Complex software on a non-Apple device will probably work well on a few recommended devices and may not be supported on others. So the smaller deviation in hardware choices ensures better developers and a higher-quality, consistent software experiences on the platform.

    I think Apple stock is selling at a discount now. There's nothing in the fundamentals that should be punishing it, Apple has been forthright with the reduction in margin, and their cash position is best suited for a much longer-term sustainable company that the typical quarter-to-quarter company that is ruled by institutional investors. Apple is focused on the long-term growth and sustainability of their ecosystem--one that has and will continue to generate significant profits.

    Apple has few products that are all great (look at the fundamentals, not the product specs). Samsung has 60 pieces of crap. Yeah, they have different models that do all this different crap. But crap is still crap, even if you have more of it.

  • Report this Comment On April 22, 2013, at 10:22 PM, dogmatica wrote:

    Aloha,

    Another very useful article, Evan. Lots of ground covered. Good job! One little tidbit: Phablets aren't selling too well; in the "active use" category, they're at 3%.

  • Report this Comment On April 22, 2013, at 11:22 PM, tkell31 wrote:

    Cook didnt take over until late in 2011....doesnt mean he shouldnt have been preparing for it sooner. Bigger screen option, cheaper phone all should be done by now. Amazingly it seems like Apple is struggling to upgrade existing products even once a year. His expertise is in supply chains and what has been one of their biggest issues in the last year? Yes, supply problems.

    All the gains made by Apple in the year after Cook took over all revolved around products that were already planned. Exactly what credit should he get for that? No, his challenge was to continue the momentum or at least not let it come crashing back down.

    It's only been 18 months, but Apple is seemingly no closer to releasing a new product, despite rumors, then when Cook took over. Apple needs to come up with something other than a slightly thinner, slightly lighter version of existing products if they want to regain the momentum they had. To me I havent seen anything that suggests Cook is even close to rising to that challenge.

  • Report this Comment On April 23, 2013, at 1:01 AM, DanManners wrote:

    Tim Mcmanus, great comment.

  • Report this Comment On April 23, 2013, at 7:31 AM, Perez195 wrote:

    Mr Cook has fail in various fronts. He is the CEO and his job is not only to show to work or going in his airplane to Washington to seat at the gallery .

    To give credit for The short term results after Steve death and for keeping the lights on is not a justification for all his pitfalls.a leader is responsible and he has failed in any many issues. He hired the wrong guy for the store, the Samsung fight was a failure, the china mobile deal still in limbo, the multiple products issues, the lack of china mobile deal and the damage to the apple brand and last where is the capital allocation plan. What are we missing. He is a bad communicator. Hard to defend

  • Report this Comment On April 23, 2013, at 10:03 AM, TMFSpiffyPop wrote:

    Tim McManus, great comment -- I concur. Also, Evan, excellent article that presents facts. Fool on. --David

  • Report this Comment On April 23, 2013, at 10:24 AM, beetlebug62 wrote:

    @DanManners,

    You wrote:

    "1. Everyone differs in opinion that Apple needs a larger phone. Everyone in Asia seems to love them."

    Samsung spends over $12B a year, promoting the notion that larger is better, as a means to differentiate their product. When larger first came out, remember the Dell 5" phone, remember how everyone laughed? A 5" phone is all marketing. In a few years, people will wonder what were they thinking? They weren't. It'll be like the 70s and big hair again.

    "2. China Mobile deal."

    Why did the Verizon deal take so long? Why hasn't Apple made a deal with the #1 Japanese carrier? About 15M people already use their iPhones on China Mobile at EDGE speeds.

    "3. NO dividend or buyback increase over one year later."

    Dear me, it's been just a little over one year. The share repurchase plan was a 3-year plan. You can't change your cash plan less than a year after you implement it, otherwise the market will think you're either panicking, or you're easily manipulated. Having Einhorn start publicly lobbying grenades at Apple has the opposite effect. It forces them to wait just a little longer, so as to appear not to cave into hedge fund pressure. If he hadn't been so impatient, Apple would likely have already announced an increase in its cash plan.

    "4. Nothing done for 8 months now."

    Right, Apple only earned $13,078,000,000 in profit last quarter, and $41.7B in the last fiscal year. Only Exxon/Mobil earned more, of all the publicly traded companies in the World. That's "nothing done".

    "5. ...if it steals mkt share then that could tank Apple more."

    The SamGal has not been stealing marketshare from Apple. It has been eating the other Android mfrs' lunch. Motorola and HTC and LG are either losing money or experiencing 98% drops in income. Apple's share is either stable or growing in developed markets like the US.

    As for any cash announcements at earnings, it's extremely unlikely, as an earnings report is about earnings. Apple very rarely mixes one topic with another. A cash announcement is likely to have its own moment in the sun.

  • Report this Comment On April 23, 2013, at 10:57 AM, beetlebug62 wrote:

    @tkell31,

    You wrote:

    "His expertise is in supply chains and what has been one of their biggest issues in the last year? Yes, supply problems."

    Yes, Cook is the acknowledged best in the World in managing a supply chain.

    Have you considered how enormous Apple's supply chain demands are now? Look at the chart above. In Q1'10 Apple needed less than 10M iPhones mfr'd. In less than 3 years, in Q4'12, Apple needed almost 50M iPhones mfr'd. Do you realize that the scale of the ramp of iOS device demand is UNPRECEDENTED? Apple is already contracting the largest contract mfr in the World, in Foxconn. They also are contracting what is probably the 2nd largest contract mfr in the World, Pegatron. Semiconductor suppliers for Apple have to add a new fabrication plant every year to keep up with Apple demand. That requires billions and time to prep. Apple is spending billions on equipment to help suppliers meet this incredible demand. This is not your typical company where product growth is 10% a year, this is Apple where product demand had been growing close to 100% a year.

    "It's only been 18 months, but Apple is seemingly no closer to releasing a new product,"

    Apple has been in business about 35 years. In that time, it has released about 5 disruptive, iconic products, the Apple II, Mac, iPod, iPhone and iPad. That's only one every 7 years. Perhaps, during Steve's time running the company, the rate of disruptive product intro was faster, as the fallow years were the decade while he was gone, so let's say 5 iconic products in 25 years, or one every 5 years. The iPad was released in 2010, so Cook has a couple more years to go.

  • Report this Comment On April 23, 2013, at 11:03 AM, beetlebug62 wrote:

    "Two things spell doom for Apple. 1. Apple has never been successful without Steve Jobs. and 2. Apple has never been successful in a mature market."

    Apple, the company, is highly successful right now. It made over $13B last quarter, and over $41B last fiscal year, the second most of any publicly traded company in the World. How is that not successful?

    As for not being successful in a mature market, are you saying cellphones weren't a mature market when the iPhone launched? That smartphones weren't a mature market when the iPhone launched? How about computers? Apple is reported to take over 50% of the PC industry's profits. How is that not successful?

  • Report this Comment On April 23, 2013, at 11:05 AM, XXF wrote:

    I would say that I agree for the most part that Apple's fundamentals support a higher valuation, but that doesn't necessarily mean that they should be trading at more lofty multiples.

    The board is 100% (or more) in the pockets of management. They let them get away with not returning money to shareholders for years while building up an absurd cash stockpile. Now the company is building a ridiculous "office building"/monument to themselves in London with an original budget of $3 billion. Like absurd construction projects do, this monument has run over 60% over budget and now has a price to complete estimate of $5 billion.

    So what exactly is Apple doing with that huge store of cash? As far as I can tell flushing it down the toilet on corporate perks, failed "innovation", and management compensation.

    The ultimate fundamental to valuing a company is the present value of the future cash flows returned to investors. Apple has shown incredible disdain for their investors and returning their investors capital to them. A company whose management cannot be trusted to act in the best interest of their principals is not a company I want to be invested in.

  • Report this Comment On April 23, 2013, at 12:25 PM, Shiroto wrote:

    There's a big difference between running a company and pleasing the stock market, and any CEO would be a fool to kowtow to the market, and its legions of get-rich-quickers.

    Cook has overseen tremendous growth in Apple's revenue and profits. He appears to be very effective at retaining and promoting Apple's top people, i.e., Ives.

    He's not perfect, no one is, but it is way too early to judge him, and foolish to judge him by the erratic swings of the market.

  • Report this Comment On April 23, 2013, at 1:02 PM, deasystems wrote:

    Tim McManus and beetlebug62: Great comments—thanks.

  • Report this Comment On April 23, 2013, at 4:13 PM, DBrown7 wrote:

    Excellent article and outstanding comments by Tim McManus.

    The problem with most investors is that they react emotionally to movements in prices of stocks that they own. Great investors, like Warren Buffett, react only to changes in the business of companies they own.

    Apple is still a great business. The stock is on sale. Do yourself a favor. Try to think like Buffett.

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