Apple Must Fix These Issues to Reach New Highs

Investors and consumers expect a lot from every Apple (NASDAQ: AAPL  ) earnings report. With many questioning if the company is still a growth story, or more of a growth and income play, Apple is hurting itself by avoiding two fairly obvious choices. With Google (NASDAQ: GOOGL  ) growing and expanding, and Microsoft (NASDAQ: MSFT  ) trying to reinvent itself, Apple can't afford to continue on its current path.

The Tim Cook plan
One of the strengths of the Steve Jobs era was the company's ability to introduce innovative products and surprise the market. Though Apple has taken evolutionary steps with each of its products, the company hasn't produced anything completely new or category-defining in a couple of years.

Apple has maintained its ability to generate billions in cash flow by moving products forward. However, at some point, the company must create something new to continue growing at a respectable rate. Tim Cook has claimed that there are exciting products in the pipeline. But, will these products be revolutionary (or at least evolutionary)?

Time to pay up
Technology companies must spend a significant amount of money on research and development to keep their edge. It just makes good logical sense. A company that spends on R&D has the opportunity to produce several hits from these ventures.

If Google didn't spend on R&D, we wouldn't have projects like Android, Glass, and more. In the company's recent quarter, Google spent 14% of its revenue on research and development, and has consistently spent over 10% on R&D in the past.

While Microsoft might not be known for strong innovation, the company is the only one of the aforementioned three that offers the same operating system on its computers, tablets, and smartphones. Google's Android can run on all of these systems, but Android on a desktop is still in its infancy.

Microsoft also has innovated with its Office software in the most recent iteration. With Office 365, users can download and use Office on PC, Mac, and even use web apps to create, edit, and share their documents with others. Similar to Google, Microsoft spent 15% of its revenue on R&D in the current quarter, and it's this type of spending that should allow the company to continue to innovate in the future.

By contrast, Apple only spent 3% of revenue on R&D in the current quarter, and has consistently spent less than 5% over the last several quarters. It's not hard to argue that Apple's lack of real innovation over the last few years could be directly correlated to the company's relatively low percentage of R&D spending. The company needs to increase its R&D spending to try and create the revolutionary products that both consumers and investors expect.

Problem No. 2-Boring is a good thing
The second issue that Apple needs to fix is the company's unpredictable product release schedule. In the last few years it has been difficult to figure out when Apple would release updated versions of their two biggest products, the iPhone and the iPad.

In 2013, Apple released the updated iPhone in September, and updated the iPad lineup in November. In 2012, there were two different updates to the iPad lineup. In 2010 and 2011, the iPhone update varied between October (2011) and June (2010). Updated iPads have come as early as March 11 (2011) and as late as November 12 (2013).

The point is, Apple's unpredictable release schedule creates lumpy demand and makes consumers question when they should upgrade. This frustration can cause customers to jump to other devices because they don't know how long they will have to wait for Apple to release the "next big thing."

News outlets are already beginning to guess about Apple's next releases. Some are expecting a new iPhone 6 as early as May 2014, and a new larger iPad by October. The bottom line is, consumers have trouble buying a new device if there are rumors of a better device right around the corner.

Google doesn't have this worry because its army of device manufacturers each have different release schedules. Microsoft's Windows Phone is supported by different manufactures as well. Only Apple has the blessing and curse being the sole provider of both its hardware and software.

Losing patience?
When you combine Apple's relatively low R&D spending, and lumpy demand due to uncertain product releases, you get nervous investors. Apple's yield of over 2%, and the hope that Apple's "next big thing" will breathe new life into this growth story seem to be supporting the stock.

However, if Apple continues its unpredictable release schedule, and doesn't surprise critics and customers alike with great new features and devices, the company's loyal customers may decide to jump ship. Lackluster new product development, and the potential for frustrated customers, could spell the end of investors patience with the stock.

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Read/Post Comments (7) | Recommend This Article (1)

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 January 09, 2014, at 12:40 PM, TTES wrote:

    "The point is, Apple's unpredictable release schedule creates lumpy demand and makes consumers question when they should upgrade."

    I don't see how a predictable product release schedule can ever be beneficial.

    If people know the next iPhone refresh will occur at a set time every year, there's no reason why they may look at the new offering and tell themselves "Yeah, that's cool. But I think I'll just wait until next year".

    Surprise product announcements got Apple where they are today. They REALLY need to bottle up all the leaks they have with their suppliers and a bit closer to the Jobsian "oh, and one more thing..." paradigm.

    A predictable Apple is a dead Apple.

  • Report this Comment On January 09, 2014, at 12:55 PM, JAVKO wrote:

    TTES

    Beautiful marketing 101 for the ever-wrong FOOL

  • Report this Comment On January 09, 2014, at 1:26 PM, garysund wrote:

    The hard facts about investing in apple is do you believe in the company and then do you have the time to wait for the good stuff to happen. I am one of those investors that has been with apple long before the iphone or even the ipod days. I have always liked the company even at the point in time when some people said the company would just disappear and go bankrupt. I owned the stock when there was no dividend paid out. The stock went up and down just like it does right now. The Critics were just as harsh or even more so then compared to today. I just hung in there. Well Now I have quite a lot of money because I hung in there. When they started paying a dividend a couple of years ago that was just the cherry on top of the cake. But it took time. I believe people who have invested at this higher rate will be rewarded just as I have. Sure you can take your money someplace else and hope for the best too. But I am staying with Apple forever.

  • Report this Comment On January 09, 2014, at 1:29 PM, applebull wrote:

    I think their problem is Price Manipulation to support Options Profits by Short sellers and Traders.

    Apple could fix their stock by doing a 10-1 Split.

    If the Stock were selling for $54 instead of $540, the emphasis would be on the stock ownership and not the Options. The manipulation of Apple's PPS by the momentum traders and short sellers is made possible by the current multiple. They know they can short 200,000 shares and drive Apple down over $5.00 per share anytime they please. They move it to their desired strike price every Friday. If the stock was $54, and the downside produced by Shorting was only 50 to 60 Cents, there would not be much profit. They would need to find a new stock to ruin. The SEC does nothing, even though every single Market participant knows the stock is not priced on Apple fundamentals or performance.

  • Report this Comment On January 09, 2014, at 2:06 PM, JokerJoey wrote:

    Both of the previous two comments are absolutely spot on.

    But like I have been saying all this week, just wait until January 27 when the stock will explode above $600 if it hasn't done so before then.

  • Report this Comment On January 09, 2014, at 3:28 PM, dapperone wrote:

    Strictly addressing the issue of reaching new highs: Apple needs an entirely new product category such as wearable tech, TV, or a revolutionary new mobile payment system (iBeacons might make this happen). The product release cycle is irrelevant to Apple's future prospects. Sometimes being late to market with a vastly superior product is the correct approach - everyone is eagerly anticipating an iWatch after having panned Samsung's ungainly smart watch. I favor a stock split and a 10-15% annual increase in the dividend. Apple's R&D spending has increased very significantly during the past year, so I anticipate that Mr. Cook will make good on his promise of significant new products.

    I continue to be amazed by the number of lemmings who continue to insist upon shorting the largest company in the world with the strongest balance sheet ever.

  • Report this Comment On January 09, 2014, at 8:28 PM, marv08 wrote:

    What value has an analysis based on so much nonsense...

    "While Microsoft might not be known for strong innovation, the company is the only one of the aforementioned three that offers the same operating system on its computers, tablets, and smartphones."

    Well, actually MS has one desktop and Intel tablet OS (Windows 8), one ARM tablet OS (Windows RT) and one smartphone OS (Windows Phone), which makes it three (if you add the various embedded versions and the Xbox to the mix, it is even more than that). Nonono, I hear you cry, I meant they share the same kernel. While that is true, but they are neither the first one to do that (Apple's iOS shares a kernel with OS X since 2007), nor are they alone in that. So, your statement is just plain wrong.

    "Microsoft also has innovated with its Office software in the most recent iteration. With Office 365, users can download and use Office on PC, Mac, and even use web apps to create, edit, and share their documents with others."

    You should truly look up the term "innovation" in a dictionary. Google and Apple had online office versions before that, Apple pioneered the integrated App Store in a desktop OS and even others like Nokia had such stores a decade ago. How often can you innovate the same thing?

    "By contrast, Apple only spent 3% of revenue on R&D in the current quarter, and has consistently spent less than 5% over the last several quarters."

    Correct. That is the benefit of concentrating on a few products only. If you take Google's "throw spaghetti to the wall" approach and kill a few products and services all the time, you also lose more money on R&D for nothing. Google's only financially viable product is Search and YouTube powered ads. Everything they have done since was a destruction of profits. You can't measure R&D efficiency as % of revenue or profits, you have to measure how much R&D money spent creates which output. Let me make it easy for you: Google and MS can't even dream of Apple's R&D efficiency. Every single Apple product creates profits.

    And then you are going really nuts:

    "The second issue that Apple needs to fix is the company's unpredictable product release schedule."

    and(!)

    "Google doesn't have this worry because its army of device manufacturers each have different release schedules. Microsoft's Windows Phone is supported by different manufactures as well."

    So, your theory is, "not all unpredictable release schedules are made the same"?

    Seriously, if you want to bash Apple, just write that they stink and have intercourse with hamsters. Makes no sense as well, but it is funny and does not make my brain hurt.

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