I have a theory about why Apple continues to spook investors.
The spooking itself is well established. Apple stock is remarkably volatile for a company that is so large and has been growing and profiting so consistently. One commonly-cited reason is that Apple’s revenue has generally been dominated by a single product or product line: first the Mac, then iPods, and now iPhones make up the majority of their revenue (for example, in the latest quarter, 68% of total revenue came from iPhone sales). The thinking goes that individual products can swing wildly in popularity. So any time a potential threat to iPhone sales emerges, Apple stock plunges (the same pattern occurred in the past around threats to iPods and Macs). Many other reasons for volatility are also cited, including the fact that Apple almost went bankrupt twenty years ago, and the general unpredictability of rapidly evolving technology markets.
Despite all this, Apple has actually been remarkably resilient since Steve Jobs returned in the late 1990’s. Customers upgrade their devices regularly and they rarely switch away from Apple. iPod sales eventually declined — because customers were buying iPhones instead. Horace Dediu has proposed that instead of focusing on the current product lineup, it makes far more sense to value Apple based on the ongoing revenue streams from its loyal customers, who each spend roughly $1 per day per product line. In this model, iPhones and Macs can (and probably will) disappear eventually, but those sales will be replaced by new product lines that Apple will have introduced by then. This model pegs Apple’s valuation far higher than the current stock price does.
But investors are smart people. They can see for themselves Apple’s customer loyalty and history of resilience in modern times. So why do they continue to be spooked?
I think one clue to the puzzle can be found in the striking disconnect between the way most journalists and analysts describe Apple, versus the way Apple describes itself. The outside narrative tends to focus on competitive opportunities and threats. For example, a recent MacRumors story about a new display technology notes: “Apple is apparently looking to quickly switch to OLED displays to [boost] iPhone sales, which analysts expect to stall.” The unspoken assumption behind this type of statement is that Apple’s goal is to boost sales — that strategic decisions tend to be made in service of “the bottom line”.
In contrast, when Apple executives are interviewed, they consistently say that Apple’s goal is not to hit any particular revenue target but rather to make the best products they possibly can. “Competitors help us improve” and “we are far more interested in customer satisfaction than market share.” The famous Steve Jobs quote is: “We’re here to put a dent in the universe.” The rhetoric from Apple executives is so consistent and unified that 60 Minutes reporters actually asked them directly if this was some sort of hype or marketing strategy. “No,” the executives replied, “this is really how it works around here.”
You can either believe Apple, or you can believe the mainstream cynicism. It’s easy to assume that Apple is no different from the rest, especially given the extraordinary amount of money they’ve made. But from all the evidence I’ve gathered as an Apple watcher over the last decade, I believe that their focus on purpose is sincere, and indeed is the cause of their consistent profitability (in what appears to be a paradox). In fact, this focus on “purpose, not profits” is one of the three pillars of radically progressive companies described in Reinventing Organizations (Laloux 2014). (The other two pillars are “wholeness” and “self-management”, which Apple currently does not score as highly on.)
The notion that a company is not trying to maximize profits would seem to be, by itself, enough to spook investors who are trying to maximize their returns. But you never see this given as a reason to dump Apple shares. Rather, the idea that profitability is not the goal is still so countercultural in business and investing today that it is apparently easier to believe that Apple is basically doing the same thing as other companies but is engaged in an elaborate marketing hoax about “thinking different” and making “the best products in the world.” Analysts can never quite figure out why this hoax continues to “fool” so many consumers into buying expensive iDevices. The whole thing feels like a house of cards that could tumble at any moment when a competitor introduces a low-cost product with similar specs. The recent history of resilience feels like a string of luck.
Once you come to understand the power of “purpose, not profits”, you realize that it’s not a reason to be spooked at all — quite the contrary, it’s the most essential ingredient in Apple’s success. But to accept that, you must abandon what might be deeply held beliefs about survival, competition, power, productivity, and the nature of success. These beliefs are often personal — what if you have been striving after profits your whole life, and the whole endeavor was fundamentally misguided? These are not ideas that you overturn just because an Apple executive told you so — indeed, mistrusting people, particularly those in power, is part of the old belief system. (See Reinventing Organizations for more on this.)
In other words, understanding Apple does not merely require an analysis of strategy or operations. It requires a worldview change. It requires a reassessment of basic assumptions about how all organizations function and disfunction.
It’s been clear for a long time that investors misunderstand Apple. Only recently am I starting to understand just how deeply the disconnect goes.