Another month, another piece of advice that Apple (NASDAQ:AAPL) would be better off ignoring. Last month, Apple -- along with anyone who has Internet access -- was treated to an imperative from Carl Icahn in regard to Apple's capital-allocation policies. Specifically, the chairman of Icahn Enterprises wanted Apple to buy back stock on an accelerated timeframe, as his valuations placed shares at $240, mostly on the back of favorable assumptions.
This month, The Wall Street Journal (subscription required) has another odd piece of advice that borders on concern trolling. In the piece, technology author Christopher Mims posits that Apple should kill off the Mac because of concerns about "focus." And although the author appears to understand this is a somewhat controversial decision, as he refers to his stance as "heresy," many of the specifics of his argument seem to lack a compelling argument. Here are a few problems with the WSJ's take on Apple's Mac line.
History rebuts the assumption of focus falloff
Perhaps the most compelling argument in the article is that by keeping the Mac line, the company won't be able to focus on new products or improve its other offerings. It's an interesting premise, but Apple's recent history disproves it. Since the beginning of this century, the company has released the iPod, iTunes, iPhone, iPad, and Apple Watch while still evolving its Mac line. If anything, the company has actually improved its ecosystem with Mac integration, creating a stronger ecosystem that's brand additive, leading to more iDevice sales overall.
Cash: a blessing and a curse
Early in the article, the author suggests Apple's "mind-boggling" $195 billion cash pile is a positive for CEO Tim Cook. And while this line of thinking is mostly correct, Apple's huge cash pile does present problems of its own. While money is great and affords optionality, growing cash so quickly, especially while engaging in a massive capital-return program, points to a lack of new investment and product opportunities to keep Apple's bottom line growing briskly for decades to come.
While it's possible some of this is due to a lack of focus, more likely it's a lack of opportunities that will afford Apple investors the high-margin returns they're accustomed to seeing. For example, recent reports that Apple nixed its TV-set project and also decided against rolling out another speaker type under its Beats brand point to margin concerns, rather than lack of ideas.
The proper response to lack of compelling investments is not to shutter a product that fits this profile, but rather to continue to build upon it to grow market share. You can bet that Apple would love solid investment opportunities with profit margins like the Mac line to invest in, rather than sitting on cash and long-term cash-equivalent investments where the returns are generally less than 3%.
In a perfect world, the company would be able to find profitable investments to put a large portion of its $195 billion to work in capex, working capital, or research and development.
Yes, the Mac line's percentage of total revenue was down, but there was a reason
Somewhat inexplicably, the author mentions that Apple "doesn't need the Mac revenue" after noting that last quarter, the company booked $6.9 billion in Mac related revenue -- or, as the author put it, "just 9% of total revenue." While that sounds like a small amount to Apple, this is simply one quarter. Apple booked over $24 billion in Mac-related revenue in fiscal 2014.
Or, as a comparison, Apple's Mac line booked nearly twice Facebook's 2014 total revenue -- enough to make the Mac line a Fortune 200 company if it was a standalone entity. It seems antithetical to just throw revenue away on that scale. And by throwing money away, I mean literally. The author doesn't propose a sale or anything -- just to shutter a $24 billion business to improve focus.
As far as the 9% of revenue goes, that's slightly disingenuous as well. There's a reason Macs are a small part of Apple's revenue haul. It's not because the business segment is struggling, but rather because the rest of Apple is doing so well. Using full fiscal year 2014 for a better comparison, the Mac line was 13.2% of total revenue during that period and up 12% year over year.
The quarter the author references the Mac's revenue is the first fiscal quarter, a seasonally heavy quarter for the iPhone, with 57% year-over-year revenue growth, therefore making Apple's other business lines a smaller portion of revenue, even if they are performing well.
Apple should focus by going outside its core competency
The biggest head-scratcher for most investors was the passing references to Apple's potential for making a car. It seems contrary to his argument that Apple should exit the device that started the company in the spirit of focus just to invest in a capital-intensive product outside Apple's core competency that generally has lower margins. For example, Apple's operating profit (not the more heavily watched gross profit that excludes research and development and selling, general, and administrative expenses) was 25% last fiscal year, while luxury manufacturer BMW reported a 10% op-profit margin.
In the end, I expect Apple to treat this advice in the same manner it handled Icahn's letter -- which was to simply ignore it. I trust Cook and the rest of Cupertino's C-suite with product development, capital allocation, and execution. An article supporting Cook's leadership and imploring readers to do the same probably won't attract the same amount of readers as a missive for Apple to shutter an entire business line, but it's been a good investing strategy so far.