Apple Inc. (AAPL) shares slipped $19.08 (5.07%) to $357.10 in after hours trading, following the resignation of its maverick Chief Executive Officer (CEO) Mr. Steve Jobs. Subsequently, Apple announced that Chief Operating Officer (COO) Mr. Tim Cook will serve as the full-time CEO.
However, Steve Jobs will continue to hold his position as the Chairman of the company. He was on medical leave since January 17, 2011 after combating a rare form of cancer since 2003 and survived a liver transplant in 2009.
Mr. Jobs, who is also the co-founder of Apple, served the company for the last 14 years. It was his second stint with Apple beginning in 1997 (the first ended in 1985, when he was unceremoniously forced to resign), which saw a tremendous turnaround in the company’s fortunes.
From the brink of bankruptcy, Mr. Jobs steered Apple to new heights and today the company is considered to be the most valued technology company. According to Bloomberg, Apple stock has appreciated 9,020% since July 29, 1997, when Mr. Jobs joined as interim CEO, to $348.7 billion from a meager $2.06 billion. Most recently, for a brief period of time, Apple was the most valuable company in terms of market value, surpassing Exxon Mobil Corporation (XOM).
Under his able leadership, Apple not only survived strong competition from Microsoft Corp. (MSFT), Google Inc. (GOOG) and International Business machines Corp. (IBM), but also became an iconic company in the technology industry, with the launch of new and innovative products and devices such as the iPod (2001), the iTunes music store (2003), the iPhone smartphone (2007) and iPad tablet (2010).
Mr. Jobs also unveiled Apple’s latest cloud offering, the iCloud, which is a complete suite of services accessible from the iPhone, iPad, iPod touch running iOS 5 and Macintosh running Mac OS X Lion, with a valid Apple ID enabling Apple product users to store and retrieve applications in the cloud for free.
What’s in Store for Mr. Cook?
Mr. Tim Cook joined Apple in 1998. As operating chief, he was in charge of sales, manufacturing and distribution. In the absence of Mr. Jobs on medical grounds, Tim Cook was responsible for the day-to-day operations of the company since January 2011. However, we believe Tim Cook has his work cut out, as he is to step into the shoes of Mr. Jobs, who has been synonymous to new ideas that develop into new products and Apple thrives on this innovation.
We believe this is a tricky situation for Mr. Cook and his board. On the positive side, Apple shares have been relatively steady despite the recent tumultuous market conditions. Moreover, the imminent iPhone 5 launch (expected September release) and heightened hype around it will do a lot to boost new management’s confidence, in our view.
However, everything is not rosy for new management. Apple continues to face tough competition in the smartphone and tablet market from Research In Motion Ltd. (RIMM), Hewlett-Packard Co. (HPQ), Dell Inc. (DELL), Samsung, Cisco Systems Inc. (CSCO), Toshiba and Acer.
As Apple remains heavily dependent of iPhone and iPad sales (68.8% of the third quarter revenue), the company is taking every possible step to safeguard its dominant position in the smartphone and tablet market, including further lawsuits against major competitors and allies such as Samsung and HTC.
However, the results of the lawsuits have been inconsistent, and an unfavorable ruling will cause a dent in Apple’s very sizeable cash balance. The company may have to pay a hefty fine or a recurring license fee, which will hurt its profitability going forward.
Apple remains entangled in a number of lawsuits against Eastman Kodak (EK), Amazon Inc. (AMZN) and Microsoft over a number of issues. As the outcome remains uncertain, we believe the lawsuits will remain an overhang on the stock going forward.
It will be interesting to see how Mr. Cook and his management team responds to these headwinds and also to the growing demands of the industry. This will hurt customer as well as investor confidence and it will be challenging for Apple to maintain its dominant position going forward, in our view.
Our Take
No doubt, Apple is a great company. But we should keep in mind that its greatness was primarily driven by the innovative acumen of its iconic ex-CEO and a bunch of exceptionally talented people, for whom successful execution of an idea was the primary motto. Whether new management has the vision to succeed on this front over time is something to keep an eye on, in our view.
We believe new management will face the brunt of tremendous investor expectations in the near term. Investors will be eager to know the direction to which the new Board aims to take the company going forward. However, we believe the window of opportunity is getting narrow as competition is increasing and markets are getting saturated.
With a loyal customer base, international expansion, competitive pricing strategy and a solid cash position, we remain positive on Apple’s long-term growth. However, increasing competition in most of its major product segments, possible delays in product launch, higher operating expenses and increasing legal complexities compel us to maintain our Neutral rating over the long term (6-12 months).
Currently, Apple has a Zacks #1 Rank, which implies a Buy rating in the near term.
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