Apple's Tim Cook Deserves Time

At this time last year, Apple (NASDAQ: AAPL  ) CEO Tim Cook was sitting on top of the world. Apple had just reported results that blew by expectations for two consecutive quarters, culminating in the company's stratospheric gross margin of 47.4% for the quarter that ended in March 2012. Not surprisingly, these strong results led to big increases in Apple's stock price. In the first nine months following Tim Cook's appointment as the permanent CEO of Apple (which occurred on Aug. 24, 2011), Apple stock soared more than 50%.

AAPL Chart

Apple Price Chart; data by YCharts.

Clearly, at this time last year, the market believed Tim Cook was a capable leader for Apple. There was comparatively little second-guessing of Cook's decisions, and no hand-wringing about what Steve Jobs would do if he were still around.

Fast-forward a year, and things have changed dramatically. Before Apple's earnings report in late April, Forbes contributor Gene Marcial asserted that anonymous "sources" had heard that Apple might be looking for a replacement CEO. Marcial further noted that several major funds had cut their holdings of Apple and cited this as evidence of a looming shareholder rebellion. Cook seems to be holding off shareholder pressure for now because of Apple's recently announced dividend and buyback increase. Still, the flurry of speculation about his job security indicates that many people think Tim Cook has not performed up to expectations. This judgment seems very hasty, though: Cook deserves at least another year at the helm to show whether he can deliver exciting new products.

The end of innovation?
Not surprisingly, the main worry about Cook's leadership is that as an "operations guy" he won't be able to drive innovation at Apple. Steve Jobs had an uncanny ability to figure out what consumers would want and devise successful marketing campaigns for the resulting products, and it is unfair to expect Cook or anybody else to "be the next Steve Jobs." That said, Apple bears believe that competitors have caught up to Apple because the company is settling for evolution rather than innovation. Bears frequently like to point to the iPhone 5 or the iPad Mini as evidence for their point.

The iPad Mini. Source: Apple.

Both products -- but especially the iPad Mini -- differentiate themselves from predecessors primarily by adopting a new form factor. The iPhone 5 has a slightly larger screen than previous iPhones, while the iPad Mini is a slimmed-down iPad with a smaller screen. Critics argue that these products are mere reactions to big-screen phones from Samsung and others, and smaller, cheaper tablets from the likes of Amazon.com and Google. Instead, they assert that Apple should be innovating by bringing completely different products to market.

Innovation is a process
The single-minded focus on what Apple has done lately seems misguided. First, it takes a long time to develop and perfect a new product category. Apple engineers were working on a touchscreen tablet by 2004 or so, more than five years before the iPad's introduction. Ultimately, Apple concentrated on the iPhone first, before returning to what became the iPad. Apple hasn't introduced any new product categories since Tim Cook took the helm, but it's quite possible that one or more products are in development and will hit the market in the next year or two.

Second, while recent iPhone upgrades have been incremental in nature, that's really a testament to Apple's already having made all of the "easy" improvements to the design. With the iPhone 4, Apple pushed the "thin, light, and sleek" design aesthetic as far as possible. The iPhone 4's successors have added other useful features, such as Siri and LTE support. However, with less room for improvement, these features seemed to many observers like evolution rather than innovation.

How will we know?
Tim Cook's critics still have one viable argument. Apple's failure to launch a new product category in the past year may not prove that innovation is dead at Apple, but it doesn't prove that innovation is alive, either. How long is it reasonable for investors to wait before concluding that something has gone wrong under Cook's leadership?

Cook may have provided the answer to that question on Apple's earnings call last month. In his prepared remarks, Cook claimed that Apple had great opportunities in new product categories, and he also stated that the company is "hard at work on some amazing new hardware, software, and services that we can't wait to introduce this fall and throughout 2014."

Accordingly, investors should wait until this product cycle plays out to make an informed judgment about Tim Cook's success or failure. Tim Cook set a clear goal for himself by setting a timeframe for new products and raising expectations for what would be coming. At the end of next year, if Apple's existing product lines have continued to stagnate and no new product line has arrived, it will be fair to blame Cook for not delivering results. As an Apple shareholder, I'm willing to give him that amount of time to impress me (and the rest of the world). I don't think I will be disappointed.

There's no doubt that Apple is at the center of technology's largest revolution ever and that longtime shareholders have been handsomely rewarded, with more than 1,000% gains. However, there is a debate raging as to 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 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 (7) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On May 04, 2013, at 3:05 PM, applefan1 wrote:

    great innovations don't come every day. An innovation isn't great unless it starts a trend and that trend is widely used. LIttle innovations come and go. When it comes to OSs, there are a LOT of considerations and just throwing ideas into an OS doesn't always work in the long term. In terms of developing a innovative product, there are lots of things to consider along the way as some might not be cost effective, reliable, secure, or the technology that is required to do it isn't mature, etc.

    Yeah, we would all want certain things in new products and sometimes they were concerned about certain aspects and they couldn't do it for a variety of reasons or they didn't think it was ready to market.

    Some ideas get released too soon and they don't get good market acceptance.

    Throwing out this BS on innovation seems like a cheap shot.

    Apple innovated the tablet design that is getting market acceptance whereas previous tablets from Microsoft-PC companies didn't. So, for the innovation of what the iPad is, THAT'S a major industry changing innovation. They are just in development/evolutionary development as that's the only they can do with that innovative design. That's all anyone else is doing too. The Surface was an innovative product from Microsoft as it's their take on a iPad, but the Surface is failing. It's now easy to get a slim keyboard and add it to an iPad, so the Surface wasn't really that big of industry changing innovation.

    I'd say that 2013 is the slump year and the calm before the storm if you will. We'll the see the new products in the second half of this year, but it will hopefully be Apple's next leap moving into 2014.

    It's OK to have a slump year every once in a while. 2012 wasn't a slump year for Apple.

  • Report this Comment On May 04, 2013, at 5:31 PM, smegma11 wrote:

    Anyone who rates a company or its people but it's stock price is either a writer or an imbecile . Nothing much has changed within the company except its stock price and they are still selling millions of phones.

  • Report this Comment On May 09, 2013, at 4:24 PM, miteycasey wrote:

    @smegma11

    +1

    Christ sames there are only 8billion people in the world. THere are only 8 billion cell phones to sell. At some point that number of iphones has to level off because there is no one left to buy one.

  • Report this Comment On May 10, 2013, at 2:44 PM, JackStaub63 wrote:

    Don't forget that even while Steve Jobs was at the helm that Apple was heavily criticized at the release of each new product category.

    Those same critics now view the iPod, iPhone and iPad as transitional, but now whine that those products are outdated, Apple is incapable of creating new products and is certain to fail without Jobs.

    Apple will soon release new products, so expect the whiners to whine, that what they do.

    But it's the pent-up demand of a few hundred million Apple customers that will become inspired and take a chance on something new. This is how new product categories are born. Apple has the brand and customer following to pull this off.

  • Report this Comment On May 13, 2013, at 12:13 PM, petecareer wrote:

    An informed and uplifting discussion, I see.

  • Report this Comment On May 14, 2013, at 10:23 PM, capsman727 wrote:

    When Steve Jobs had passed Apple said he had left dozens of new products in the pipeline, well they better start pumping soon..

    The last New or Innovative product was nearly three years ago, since then they've all been getting minor tweaks.

  • Report this Comment On May 16, 2013, at 5:53 AM, shlsh wrote:

    I read that Steve had told Tim to "be himself" while running the company. So if someone as critical as Steve could trust this man with the company, I do too.

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