The recent gyrations in Apple's stock price -- particularly precipitous drops in the wake of favorable quarterly reports and an underlying low P/E valuation -- lead one to question the rationality of the market. Undoubtedly the stock had a long run and was oversold as the stock de jeur for many investors hoping to ride the hype all the way to $1000+ per share and untold riches.
But are the recents drops to +/- $450 solely the result of "me too" poor press, bad mojo and timid, irrational consumer investors?
Several articles about Clay Christenson and the principles detailed in The Innovator's Dilemma has provided much insight into the quandary facing Apple and what it must do to continue its run as the world's most innovative and valuable company.
Here is Christenson's summary of his theory of how even "[s]mart companies fail because they do everything right":
They cater to high-profit-margin customers and ignore the low end of the market, where disruptive innovations emerge from.
Christenson goes on to provide visualization by explaining how mini steel mills "killed off big steel companies":
They started by making rebar cheaper than the big mills did, and the big mills were happy to be rid of such a low-margin, low quality product. The mini mills then slowly worked their way upward until there was nothing left to disrupt.
As noted by the March 2013 Harvard Business Review, The Big Disruption, the pace of disruption is ever-increasing (similar to Moore's Law) as "technologies become cheaper to manufature and deploy, innovators can experiment with new applications at little risk to investors, abandoning prototypes that do not quickly prove popular."
Sound a little like Samsung's initial cheap smartphones coupled with open-sourced Android from Google?
So what is Apple to do to survive this "Big-Bang Disruption" in its most profitable segment - the iPhone?
Christenson and the Harvard Business Review map out a path:
- See It Coming. Recognize the warning signs -- usually the picking-off of low-end customers.
- Slow the Disruptive Innovation Long Enough to Better It. Lower prices, lock-in customers with long-term contracts and form strategic alliances to ensure that the disrupters can't make money from their inventions until you're ready to acquire them.
- Get Closer to the Exits. Have leadership that is prepared and willing to evacuate current markets and sell-off once valuable practices and assets.
- Try a New Kind of Diversification. Having a diverse set of businesses and income streams is vital.
Is Apple following this formula?
Apple has been buying up or partnering with other strong players in mobile (witness integration of Facebook and Twitter in iOS). They have built up a cash reserve that ensures they can swallow competitors and/or buy needed technology and advances. We hear talk of the "cheap iPhone" as a way to tap the lower-end and emerging smartphone market; if this doesn't work, older models of phone are continually re-introduced at lower prices.
Finally, and perhaps most importantly, Apple appears to be charging ahead with the development of new markets (iWatch or iTV), while slowly growing market share in existing profitable segments (still feature leading laptops and the expansion of the iPad line at lower prices).
Finally, they continue to produce high-end to keep the brand visible.
No fears of Apple's death by sudden disruption at HMV. HMV remains long Apple and will increase it's holdings at good valuations.