Apple still 'extraordinarily strong'
Loizos Heracleous, a professor of strategy at Warwick Business School, says those writing off Apple after its disappointing earnings update are premature
Heracleous has done extensive research on the company revealing its "˜Quantum Strategy' in a paper for Organisational Dynamics.
Although Apple's results saw $50 billion wiped off its market value he doesn't feel it is the first sign of strategic weakness as some analysts are suggesting.
Apple reported no rise in profits for the final quarter of 2012 and slightly missed revenue estimates, prompting speculation that its period of hyper-growth is coming to an end.
Apple sold 47.8 million iPhones over the Christmas quarter, missing a forecast average of around 50 million and revenue growth of 18 percent year on year to $54.5 billion was below the $54.9 billion forecast, while profits were flat on the previous year at $13.1 billion.
But Heracleous, says, "Before we write Apple off with premature assessments, we need to appreciate that its so-called disappointing performance is still extraordinary by many measures, and that it has the capabilities to keep winning in its markets, which it may yet redefine with more blockbuster products.
"Apple is thought by many to have posted poor results, but this would be a rushed assessment. Apple's revenues continued growing at a fast pace, with an 18 percent rise over the previous year and 25 percent more when adjusting for the fact that this quarter was for a 13-week period while the previous year was for 14 weeks."
"Profits were $13.1 billion, same as the previous year, but actually seven percent higher if the 13 week vs 14 week issue is taken into consideration. Gross margin fell to 38.6 percent compared to 44.7 percent year-on-year, but Apple had prepared the market about the lower margin and actually delivered above its own guidance."
"Lower margins would be expected given Apple's rising sales in emerging economies, introduction of iPad mini and appearance of more competing products that are much cheaper. The 38.6 percent margins in the markets where Apple operates are still extraordinary," adds Heracleous.
"Speaking of emerging markets, Apple's higher transparency in reporting sales by geography shows that its revenues in China went up 67 percent in this quarter compared to last year, with a huge potential upside. Further, its products are on different stages of the product life cycle, a pretty robust risk management strategy."
Heracleous believes that even if in the long term Apple has lost some of its innovative edge its substantial liquid assets still give it an advantage in the technology market.
"The main issue for the medium and long term is whether Apple has sustained its innovative capabilities, which seems likely given that it's part of the company's DNA. But the proof will be in the pudding, and we'll know over the next 12 to 18 months," points out Heracleous.
"What many forget though is Apple's safety net of $137 billion cash and liquid assets. Apple could easily buy any new technologies that appear to pose a threat to it, that offer synergies to its own offerings, or that can open up new markets for it."
"Stock markets react, and sometimes overreact, immediately, but what matters is the big picture and Apple seems to be on a solid footing by that measure. Even though its shares fell based on the earnings announcement, this could be a useful correction," he concludes.
