Why Investors Are Missing the Big Picture at Apple

With attention focused on Apple's (NASDAQ: AAPL  ) new phones, market share, and a potential deal with China Mobile, investors may be missing the bigger picture.

It's not that those things are unimportant. They drive short-term movements in the stock price, although perhaps not as much as Carl Icahn's tweets. But for those of you in this for the long haul, there remains a bigger issue out there: Can Apple be as innovative and execute as sharply without Steve Jobs as it did with him?

To say the loss of a founding CEO is a game-changer is an understatement. A founding leader gives a company its vision. He establishes its mission in the world. He understands better than anyone the relationship it maintains with its customers. He embodies the corporate culture.

Those are not small matters. They're huge. And it probably wouldn't have come as a surprise if Apple's stock price cratered after Jobs' death on Oct. 5, 2011. But it didn't. Instead, it nearly doubled off its $367 Oct. 5 price over the next year. That type of stock performance in the wake of Jobs' loss defied reason. But stock prices, in the short-term, are rarely tethered to reason.

Apple bears would have you believe that every great idea that materialized in Cupertino originated with Jobs; now that he's gone, so is the game-changing innovation. If you think that's the case, read Jobs' biography by Walter Isaacson. Even design chief Jony Ive was among those who felt snubbed that Jobs received so much credit for Apple's innovative ideas.

But it was Jobs who created the Apple culture that fostered innovation. And it was Jobs who served at its chief steward. Apple will innovate without Jobs. But will Apple be able to innovate in a way that maintains its relationship with loyal customers? Will it be able to innovate in a way that introduces new products we never wanted, but suddenly can't do without?

Following in the footsteps of its rival?
We can gain some perspective by looking at history. What happens when a tech giant's founding leader leaves?
The easy comparison here is to Microsoft (NASDAQ: MSFT  ) . We all know Microsoft's track record since Bill Gates stepped down in 2000, handing the reins to Steve Ballmer. By many accounts, the next 12 years were a disaster. Investors were so happy to see it come to an end, Microsoft's stock shot up by more than 7% on the news of Ballmer's retirement. 

Microsoft didn't exactly flounder under Ballmer. The company nearly tripled revenue and just about doubled its earnings per share. But Microsoft lagged where it really mattered. It got flat-out toasted by Apple and Google in the big technological transitions. With the wild success of Android software and Samsung mobile hardware, it's easy to see how Apple could "Microsoften," to steal a term from the Fool's Alyce Lomax.

Showing the way
But other stories haven't been so grim. Consider Hewlett-Packard (NYSE: HPQ  ) . Forget what's it's done recently, and look to the past. After Bill Hewlett stepped down as CEO in 1978, the company grew its revenues from $2.4 billion to $20 billion over the next 14 years, a 16.4% annual clip. How did it do it? Six years after Hewlett, the company introduced inkjet printing to the world. 

From 1992 to 1997, HP grew revenues by an average of 24% per year, as CEO Lewis Platt took the company beyond computers and printers and into a variety of digital products. It was named Forbes' company of the year in 1995.

By the time Platt stepped down, HP's stock price had mushroomed by nearly 2,800% over what it was selling when Hewlett was running the company. At the start of 1978, H-P's stock was selling for $1.14. By March 5, 1999, it was selling for more than $33. 

Over that same time frame, the Dow gained about 1,140%.

Like Jobs and Steve Wozniak, Hewlett and David Packard started their company out of a garage and guided it to greatness. Along the way, they built a culture at H-P and made sure that culture carried over after their departure from everyday operations. Today, we can read about it as "the H-P Way," and CEOs like John Young and Platt came to embody it as much as their predecessors.

Is there an "Apple Way?"
The big question in Cupertino isn't about pre-orders on the colorful iPhone 5c, but whether Jobs created and fostered a lasting culture at Apple. Bears look at plastic phones, bungled map apps, and declining worldwide market share as signs that Jobs failed in this regard.

But Apple execs like Ive and Jobs' successor, Tim Cook, have said otherwise. In fact, it was Cook's words, not Jobs', which came to be seen as the description of Apple's equivalent of the H-P Way. It was dubbed "The Cook Doctrine." Here's a snippet:

... we don't settle for anything less than excellence in every group in the company, and we have the self-honesty to admit when we're wrong and the courage to change. And I think, regardless of who is in what job, those values are so embedded in this company that Apple will do extremely well.

Long-term investors will need to keep their eye on what may be Jobs' most important creation: a corporate culture we can call "The Apple Way." If he succeeded, there are good things ahead.

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Read/Post Comments (6) | Recommend This Article (3)

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 September 20, 2013, at 2:50 PM, ChurchyLaFemme wrote:

    As far as I'm concerned, the vast majority of analysts are incapable of wiping their own butts let alone making anything resembling a cogent comment on any publicly traded company

    I've owned shares of AAPL for nearly 15 years. AAPL is paying me a dividend that constitutes 120% plus of the price I paid for it years ago. Of course, back then, the pundits were all but writing AAPL off. Why should I, or any sane person, listen to the drivel coming off the keyboards of people who, in earlier times, would be accuratlely described as being incapable of distinguishing feces from shoe polish

  • Report this Comment On September 20, 2013, at 3:00 PM, eldernorm wrote:

    Good article but you missed it.

    Apple University. Steve Jobs hired a leading university exec to create a way of keeping What made Apple great and passing it on to each new executive.

    The focus of excellence and innovation is still alive at Apple. Its just kept internal and advertised.

    Just saying.

  • Report this Comment On September 20, 2013, at 3:09 PM, rh33 wrote:

    While the writer is correct about the minor, short-term matters versus the big picture, he also misses part of the big picture. The facts are that

    Apple has enjoyed terrific margins on its products and terrific market share gains for a considerable period. Such a favorable confluence of circumstances cannot be sustained over a long period by anyone, Steve Jobs, Tim Cook, or anyone else. This is especially true in the tech industry where new developments happen rapidly. The iPhone and the iPod, for example, have much less distinction from the competition than they did a few years ago. The iPad never did have the distinctiveness that the iPod and the iPhone did. Sure, Apple did pull rabbits out of hats, but eventually, there will be more companies pulling out rabbits. To some extent, that has already happened. Also, already we are at the point where the best time to sell Apple stock was in the past. Apple has made its money recently on selling a lot of devices whose more normal price point is around $50 or $100 than what Apple has been getting for them. Be wise; ask yourself, can this last indefinitely? Avoid the notion that this company is so special that the past does not predict the future for them.

  • Report this Comment On September 20, 2013, at 3:09 PM, jekoslosky wrote:

    eldernorm, you may be right. Execs at Apple like Cook and Ive certainly seem to believe that culture is alive and strong. But I think we'll need to wait and see what Apple delivers over the next few years. Phone and tablet upgrades don't give us much insight.

  • Report this Comment On September 20, 2013, at 3:34 PM, metoo5 wrote:

    The "easy" comparison to Microsoft is absurd in the context of this article. The dirty secret is that Balmer is not to blame for MS demise. The fault is Gate's himself for being a short-term thinking businessman, albeit a very clever one. Bottom line is that that game had to end badly, and he was smart enough to know it.

    http://www.washingtonpost.com/business/whats-behind-microsof...

  • Report this Comment On September 20, 2013, at 9:27 PM, metoo5 wrote:

    rh33: The whole "Apple will return to the mean" meme is vacuous. In the long-term we're all dead. But I'd say that Apple isn't in danger of returning to the mean while their competitors are in denial about what made them successful in the first place. And they are in denial, and so are you.

    Why should we listen to people that never understood why Apple was successful tell us when they'll stop being successful?

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