Apple Inc. (AAPL) Cheap Because It Is Falling Behind On Innovation?

Apple Inc. (AAPL) Cheap Because It Is Falling Behind On Innovation?

Recently, this blog has focused on two aspects of the investment Apple Inc. (NASDAQ:AAPL) story.  One is that by any reasonable standard the stock is extraordinarily cheap.  The other is that the Apple policy of tight secrecy followed by grand announcements is harming the company.  Going forward the two may become more closely related than I appreciated heretofore.

Apple – why the secrecy?

In the days when the most rapid innovation in consumer electronics involved fundamentally new hardware, the Apple secrecy policy made more sense.  Develop a new hardware product in secret (iPod, iPhone and iPad) and then announce it to great fanfare.  While I still suspect that Apple may have succeeded in spite of this policy, not because of it, those days are over.  Looking ahead, it is hard not to believe that future innovation will in software more than hardware.  The fundamental issue is this.  Computers keep getting faster and smarter, but humans remain humans.  We keep bumbling along the way we always have except now we are asking computers to help us with our bumbling.  Future value creators will be firms the can harness artificial intelligence (AI) to help us bumble more effectively.  But the process of developing such AI is almost sure to be an interactive one.  Companies come up with initial products.  Customers interact with the products and complain.  Companies upgrade the product in response to which customers develop new complaints and so on ad infinitum.  The point is that to be successful AI developers will need constant feedback from their customers who become, in effect, part of the development team.  Keeping customers in the dark until some secret project makes a grand entrance is not going to work in this space.

From an investment perspective, I fear that Apple has not embraced this new landscape as completely as competitors including Google, Amazon, Facebook and even Microsoft.  If so, there may be a good reason why Apple’s stock is so cheap.  If future AI turns out to be the driver of future devices sales, Apple better get on board quickly and invite its customers onto the ship as well.  As I have said in the past, Apple’s integrated combination of hardware and software gives it a leg up in solving future problems for its customers, but it will have to innovate aggressively in the AI space to take advantage of that.  The key investment question is whether Apple will do so.

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Bradford Cornell is an emeritus Professor of Financial Economics at the Anderson School of Management at UCLA. Prof. Cornell has taught courses on Applied Corporate Finance, Investment Banking, and Corporate Valuation. He is currently developing a new course on Climate Change, Energy and Finance. Professor Cornell has published more than 125 articles and four books on a wide variety of topics in applied finance. Professor Cornell is also a managing director at BRG where he heads the practice on Climate Change, Energy and Finance. In addition, he is a senior advisor to the Cornell Capital Group and to Rayliant Global Advisors. In both capacities, he provides advice on fundamental investment valuation.
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