Core values: where to next for Apple?

FEW COMPANIES have ever had a year as dramatic as Apple’s past 12 months. From the resignation and death of founder Steve Jobs to controversy over its Chinese manufacturing operations, from becoming the world’s largest company by market cap to winning a landmark patent dispute against rival Samsung, the California company has rarely been out of the headlines.

September alone, while JP Morgan estimates that it will add up to 0.5 per cent to US GDP growth.

And at some point in October, speculation is rife that Apple will launch a smaller version of the iPad, most likely featuring a 7.85in screen.

These could be the most critical product releases in years for a company whose astonishing revenues and growth – with its valuation soaring nearly 9,000 per cent since 2003 – seems to rely on its ability to regularly churn out blockbuster products.

Any hint that the products fall short of expectations or fail to ignite the customary fervent reaction from the company’s committed fans will be interpreted as a sign that, in the post-Jobs era, the magic touch is waning.

But one of the most astute analysts covering the company, Horace Dediu, insists that the market’s attitude towards the company, and the focus on the company’s hit releases, is misguided.

“My impression is that the company is considered fragile, that it relies on these hit products, which very quickly become swamped by competitors, which become commoditised if you will. So it depends on, only survives, because it is able to create another breakthrough product.”

Dediu points out that “the company is trading at a very, very, very depressed valuation of 15 times earnings. It’s almost a disposable valuation. It’s considered less valuable as a company than your average consumer electronics company.”

Indeed, suggestions that the stratospheric rise in its share price and massive market cap is evidence of an Apple bubble are common.

Dediu, a Romanian-American former Nokia executive who has gained a reputation as one of the most perceptive analysts in the business since founding research firm Asymco in 2010, suggests that such an approach is misleading. He cites another former Steve Jobs company, Pixar, as illustrative of the double standard.

“Pixar figured out how to manufacture blockbusters. As a result it was bought at a very high valuation. But Apple doesn’t have a valuation that implies it’s a blockbuster-manufacturing company. It’s priced as if it’s an average company that happens to have a few very good products in its repertoire today.

“But it isn’t priced in a way to say it’s going to keep going. It just happens that these are huge products and is enormously profitable, but that’s on an absolute scale. On a relative scale, it doesn’t seem to be something that people are willing to say is long-term. That’s the paradox of Apple – it’s huge in the absolute sense, and tiny in the relative sense.”