In yesterday’s Money Morning we were talking about how any company – even the most solid – can be hit by unexpected events.
Apple investors have just had concrete experience of this. Chief executive Steve Jobs, who has had on-and-off health problems for some time, is taking medical leave.
This sort of thing is never good news for a company. But in Apple’s case, it’s particularly hard-hitting. Jobs is seen as the company’s creative driving force. Its share price slid on markets around the world (the US was closed yesterday for a holiday). That’s even although today’s first quarter earnings report is expected to be very strong.
What can investors learn from this? And should you consider investing in Apple?
How can Apple’s share price rest solely on Jobs’ shoulders?
At first glance, the reaction to the news that Steve Jobs is going on medical leave again may seem daft.
How can the fortunes of a company the size of Apple – the world’s biggest tech stock by market capitalisation – rest solely on the shoulders of one man? And what does it say about his managerial skills? A good chief executive should be able to step back without causing a collapse in the share price.
Look at Sir Terry Leahy, head of Tesco. He surprised everyone by announcing his retirement plans last year. Yet the share price barely murmured. Investors trust him to have left behind a rock-solid company with smooth succession planning in place.
As Peter Lynch once put it: “Go for a business that any idiot can run – because sooner or later any idiot probably is going to be running it.”
That’s how the argument goes at least. But this nice catchy soundbite doesn’t necessarily stand up to scrutiny. For example, Warren Buffett has expressed similar sentiments to Lynch. But what’s Berkshire Hathaway without Buffet and Charlie Munger? Just another investment vehicle.
Berkshire has yet to prove that it can be as successful without their double act at its heart. And we won’t find out if it can, until long after they’ve stopped taking an active role in the company. So you have to wonder how many investors will give the company the benefit of the doubt and hang around waiting to see how their successors do.
People pay for talent
The fact is that people pay a premium for talent. That’s why top footballers get paid so much. We’re told it’s why bankers and directors get paid so much (though in reality it’s because their compensation is largely set by their peers, who are incentivised to give them as much as possible).
And some industries rely more obviously on talent more than others. I’m sure Sir Terry is a very talented retailer. Tesco wouldn’t be the top supermarket if he wasn’t. But people assume that the business is all about systems and logistics, so the focus doesn’t fall as heavily on the people.
Other industries are different. You only have to look at the recent shenanigans with fund management group Gartmore to witness that. A fund group rises and falls on the strength of its fund management team. So when key staff left, investors didn’t see the value in hanging around. As my colleague Merryn pointed out at the time, it’s a good reason never to invest in fund management companies.
Tech companies are somewhere between the two. They’re about products as well as people, but it’s a creative industry, so the people with the big ideas tend to be the focus. Can Apple thrive without Jobs at its heart? I’m sure it can. It’s a very successful company with a great brand and loyal customers. It’s not going to go to the wall just because Jobs isn’t at the helm. But can it sustain its valuation? That’s another question. “The problem, really at the core,” Piper Jaffray’s Gene Munster tells The New York Times, “is that Steve Jobs’ inspiration is irreplaceable.”
If Jobs comes back – and hopefully he will – this will probably turn out to have been a buying opportunity, just as his previous medical absences have been buying opportunities. But that’s hardly the best rationale for deciding to invest in a stock. An investment in Apple just now is a bet that it can continue its rampant growth, even with a wide range of competitors entering the smartphone and tablet markets.
A better way to profit from Apple’s success
Perhaps it can, even without the talents of Jobs. But US magazine Barron’s points out that there’s a way to profit from the success of Apple’s products without buying Apple shares. And it’s one that should be very interesting to British value investors.
In the US, they’re getting very excited about the fact that telecoms group Verizon Wireless is going to be allowed to sell Apple’s iPhone from next month. The bullish argument is that Verizon will steal millions of iPhone customers from AT&T Wireless, the existing provider, due to its superior network.
Who owns a big chunk of Verizon Wireless? Why, our very own Vodafone. The company holds 45%. So it’ll benefit from any iPhone-related boost received. And there’s hope that Verizon Wireless will also start paying dividends by the end of 2012, which would be great news for Vodafone. It pays a nice 4.8% current dividend yield too.
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