An Apple Identity Crisis? Not Likely
As Apple fights for market share in light of Samsung's success, the Street is wondering whether or not Apple will make compromises for the sake of revenue. In Tim Cook's recent interview at the Goldman Sachs Tech Conference, the Apple CEO was resolute: Apple remains laser-focused on creating the world's greatest products. "That's the only religion that we have," said Cook. So what could this stay-the-course attitude mean for Apple investors in 2013?
Toss out concerns of a potential Apple identity crisis. Central to Apple's strategy today are the same two underlying tactics that drove Apple's success in the past: a conservative acquisition strategy that avoids acquiring revenue for revenue's sake, and a refusal to make "cheap" products. Together, these two approaches have been fundamental to Apple's focused strategy.
After all, why should Apple change its strategy? Though Apple's market share of the worldwide smartphone market is just about 20%, the company owns a whopping 75% of the profit.
Large acquisitions are unlikely
As pointed out by Goldman Sachs analyst Bill Shope, Apple's acquisitions relative to its size and overall cash balance have been very small. Based on Cook's comments in the Goldman Sachs interview, investors should expect this trend to continue. But given Apple's success with acquisitions in the past (or at least Apple's lack of poor acquisitions), this should be good news to investors.
Though Cook did claim that Apple has looked at potential large acquisitions, and that the company would consider them in the future, his comments reflect continued conservatism toward acquisitions: "We don't feel a pressure to just go out and acquire revenue." In other words, it is very unlikely that Apple will make a large acquisition simply to put its cash balance to work or to diversify its business.
Not all tech companies have a conservative acquisition strategy. Microsoft has spent a considerable sum on acquisitions. While some of its investments seem to have turned out exceptionally well (Skype, Bungie), others have failed miserably. Consider, for instance, Microsoft's $200 million purchase of a 2% stake in Best Buy's common stock or its $6 billion purchase of aQuantitive that ended in a $6.2 billion writedown. Microsoft's spotty track record is clear evidence of the great risk involved in acquisitions. Of course, the larger the acquisition, the more this risk gets magnified.
Don't expect a "cheap" iPhone
Cook was very clear when it came to Apple's stance on creating quality products: "Our North Star is great products." Apple marketing chief Phil Schiller stated it even clearer: "Despite the popularity of cheap smartphones, this will never be the future of Apple's products."
But that doesn't mean that Apple won't have a lower-cost solution to the obvious problem of a very large market of developing countries that can't afford an iPhone. Cook gave the example of Apple's solution to demands for an Apple laptop that cost less than $1,000: Apple couldn't respond to this demand with a laptop, but they did invent the iPad. "And now all of a sudden we have an incredible experience and it starts at $329," Cook said. In this context, the rumored iWatch begins to make sense.
One way or another, the pressure for cheap products is on. Google's Android has made enormous progress by shipping its software on cheap smartphones at price points at which Apple struggles to remain competitive. In China, for instance, Android market share is growing by triple digits. In fact, a recent report claims that Google's Android holds 86% market share in China. Google's own Chromebook is priced at $249, and its Nexus 7 tablet at $199 -- prime examples of the compelling offerings at lower price points that are putting pressure on Apple's market share.
So don't expect Apple to respond with a "cheap" product. Instead, Apple could likely respond with a new, lower-cost alternative to today's iPhone. Maybe an iWatch? An iPhone Mini?
Cook's comments reflect the Apple culture that brought the company so far in the first place, with a focus on making great innovative products.
With Apple now trading at a paltry P/E of 10.4, investors don't need Apple to go out on a limb -- they simply need Apple to maintain its competitive advantage and its reputation for innovation. A conservative and diligent acquisition strategy, combined with a determination to make revolutionary and innovative products, should help Apple do exactly this. On that note, my Apple outperform CAPScall remains one of my top picks.
There's no doubt that Apple remains laser-focused on making great products. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.
The article An Apple Identity Crisis? Not Likely originally appeared on Fool.com.Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Apple, Goldman Sachs, and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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