Tim Cook’s ‘Ballmer-ization’ Of Apple

Tim Cook’s ‘Ballmer-ization’ Of Apple

(Photo by Andrew Burton/Getty Images)

Apple’s stock is on a tear. After languishing for well over a year, it is back to record high levels. Once again Apple is the most valuable publicly traded company in America, with a market capitalization exceeding $700 billion. And pretty overwhelmingly, analysts are calling for Apple’s value to continue rising.

But today’s Apple, and the Apple emerging for the future, is absolutely not the Apple which brought investors to this dance. That Apple was all about innovation. That Apple identified big trends – specifically mobile – then created products that turned the trend into enormous markets. The old Apple knew that to create those new markets required an intense devotion to product development, bringing new capabilities to products that opened entirely new markets where needs were previously unmet, and making customers into devotees with really good quality and customer service.

That Apple was built by Steve Jobs. Today’s Apple has been remade by Tim Cook, and it is an entirely different company.

Today’s Apple – the one today’s analysts love – is all about making and selling more iPhones. And treating those iPhone users as a “loyal base” to which they can sell all kinds of apps/services. Today’s Apple is about using the company’s storied position, and brand leadership, to milk more money out of customers that own their devices, and expanding into adjacent markets where the installed base can continue growing.

UBS likes Apple because they think the services business is undervalued. After noting that it today would stand alone as a Fortune 100 company, they expect those services to double in four years. Bernstein notes services today represents 11% of revenue, and should grow at 22% per year. Meanwhile they expect the installed base of iPhones to expand by 27% – largely due to offshore sales – adding further to services growth.

Analysts further like Apple’s likely expansion into India – a previously almost untapped market. CEO Cook has led negotiations to have Foxxcon and Wistron, the current Chinese-based manufacturers, open plants in India for domestic production of iPhones. This expansion into a new geographic market is anticipated to produce tremendous iPhone sales growth. Do you remember when, just before filing for bankruptcy, Krispy Kreme was going to keep up its valuation by expanding into China?

Of course, with so many millions of devices, it is expected that the apps and services to be deployed on those devices will continue growing. Likely exponentially. The iOS developer community has long been one of Apple’s great strengths. Developers like how quickly they can deploy new apps and services to the market via Apple’s sales infrastructure. And with companies the size of IBM dedicated to building enterprise apps for iOS the story heard over and again is about expanding the installed base, then selling the add-ons.

Gee, sounds a lot like the old “razors lead to razor blade sales” strategy – business innovation circa 1966.

Overall, doesn’t this sound a lot like Microsoft? Bill Gates founded a company that revolutionized computing with low-cost software on low-cast hardware that did just about anything you would want.  Windows made life easy. Microsoft gave users office automation, databases and all the basic work tools.  And when the internet came along Microsoft connected everyone  with Internet Explorer – for free! Microsoft created a platform with Windows upon which hordes of developers could build special applications for dedicated markets.

Once this market was created, and pretty much monopolized by Microsoft CEO Gates turned the reigns over to CEO Steve Ballmer. And Mr. Ballmer maximized these advantages. He invested constantly in developing updates to Windows and Office which would continue to insure Microsoft’s market share against emerging competitors like Unix and Linux. The money was so good that over a decade money was poured into gaming, even though that business lost more money than it made in revenue – but who cared?  There were occasional investments in products like tablets, hand-helds and phones, but these were merely attractions around the main show. These products came and went and, again, nobody really cared.

Ballmer optimized the gains from Microsoft’s installed base. And a lot – a lot – of money was made doing this.  nvestors appreciated the years of ongoing profits, dividends – and even occasional special dividends – as the money poured in. Microsoft was unstoppable in personal computing. The only thing that slowed Microsoft down was the market shift to mobile, which caused the PC market to collapse as unit sales have declined for six straight years (PC sales in 2016 barely managed levels of 2006). But, for a goodly while, it was a great ride!

Today all one hears about at Apple is growing the installed base. Maximizing sales of iPhones. And then selling everyone services. Oh yeah, the Apple Watch came out.  Sort of flopped.  Nobody really seemed to care much. Not nearly as much as they cared about 2 quarters of sales declines in iPhones. And whatever happened to AppleTV? ApplePay? iBeacons? Beats? Weren’t those supposed to be breakthrough innovations to create new markets? Oh well, nobody seems to much care about those things any longer. Attractions around the main event – iPhones!

So now analysts today aren’t put in the mode of evaluating breakthrough innovations and trying to guess the size of brand new, never before measured markets. That was hard. Now they can be far more predictable forecasting smartphone sales and services revenue, with simulations up and down.  And that means they can focus on cash flow. After all, Apple makes more cash than it makes profit!  Apple has a $246 billion cash hoard. Most people think Berkshire Hathaway, led by famed investor Warren Buffett, spent $6.6 billion on Apple stock in 2016 because Berkshire sees Apple as a cash generation machine – sort of like a railroad! And if those meetings between CEO Cook and President Trump can yield a tax change allowing repatriation at a low rate then all that cash could lead to a big one time dividend!

And, most likely, the stock will go up. Most likely, a lot. Because for at least a while Apple’s iPhone business is going to be pretty good.  And the services business is going to grow.  It will be a lot like Microsoft – at least until mobile changed the business. Or, maybe like Xerox giving away copiers to obtain toner sales – until desktop publishing and email cratered the need for copiers and large printers.  Or, going all the way back into the 1950s and 60s, when Multigraphics and AB Dick practically gave away small printers to get the ink and plate sales – until xerography crushed that business.  Of course you couldn’t go wrong investing in Sears for years, because they had the store locations, they had the brands (Kenmore, Craftsman, et.al.,) they had the credit card services – until Wal-Mart and Amazon changed that game.

You see, that’s the problem with all of these sort of “milk the base” businesses. As the focus shifts to grow the base and add-on sales the company loses sight of customer needs. Innovation declines, then evaporates as everything is poured into maximizing returns from the “core” business. Optimization leads to a focus on costs, and price reductions.  Arrogance, based on market leadership, emerges and customer service starts to wane. Quality falters, but is not considered as important because sales are so large.

These changes take time, and the business looks really good as profits and cash flow continue, so it is easy to overlook these cultural and organizational changes, and their potential negative impact. Many applaud cost reductions – remember the glee with which analysts bragged about the cost savings when Dell moved its customer service to India some 20 years ago?

Today we’re hearing more stories about long-term Apple customers who aren’t as happy as they once were.

Genius bar experiences aren’t always great. In a telling AdAge column one long-time Apple user discusses how he had two iPhones fail, and Apple could not replace them leaving the customer with no phone for two weeks – demonstrating a lack of planning for product failures and a lack of concern for customer service.  And the same issues were apparent when his corporate Macbook Pro failed.  This same corporate customer bemoans design changes that have led to incompatible dongles and jacks, making interoperability problematic even within the Apple line.

Meanwhile, over the last four years Apple has spent lavishly on a new corporate headquarters befitting the country’s most valuable publicly traded company. And Apple leaders have been obsessive about making sure this building is built right! Which sounds well and good, except this was a company that once put customers – and unearthing their hidden needs, wants and wishes – first. Now, a lot of attention is looking inward. Looking at how they are spending all that money from milking the installed base. Putting some of the best managers on building the building – rather than creating new markets.

Who was that retailer that was so successful that it built what was, at the time, the world’s tallest building?  Oh yeah, that was Sears.

Markets always shift. Change happens. Today it happens faster than ever in history. And nowhere does change happen faster than in technology and consumer electronics. CEO Cook is leading like CEO Ballmer. He is maximizing the value, and profitability, of the Apple’s core product – the iPhone. And analysts love it.  It would be wise to disavow yourself of any thoughts that Apple will be the innovative market creating Jobs/Ives organization it once was.

How long will this be a winning strategy? Your answer to that should determine how long you would like to be an Apple investor. Because some day something new will come along.

Why Investors Should Support the Tesla, SolarCity Merger

Why Investors Should Support the Tesla, SolarCity Merger

In early August Tesla announced it would be buying SolarCity. The New York Times discussed how this combination would help CEO Elon Musk move toward his aspirations for greater clean energy use. But the Los Angeles Times took the companies to task for merging in the face of tremendous capital needs at both, while Tesla was far short of hitting its goals for auto and battery production.

Since then the press has been almost wholly negative on the merger. Marketwatch’s Barry Randall wrote that the deal makes no sense. He argues the companies are in two very different businesses that are not synergistic – and he analogizes this deal to GM buying Chevron. He also makes the case that SolarCity will likely go bankrupt, so there is no good reason for Tesla shareholders to “bail out” the company. And he argues that the capital requirements of the combined entities are unlikely to be fundable, even for its visionary CEO.

musk-tesla-solarcityFortune quotes legendary short seller Jim Chanos as saying the deal is “crazy.” He argues that SolarCity has an uneconomic business model based on his analysis of historical financial statements. And now Fortune is reporting that shareholder lawsuits to block the deal could delay, or kill, the merger.

But short-sellers are clearly not long-term investors. And there is a lot more ability for this deal to succeed and produce tremendous investor returns than anyone could ever glean from studying historical financial statements of both companies.

GM buying Chevron is entirely the wrong analogy to compare with Tesla buying SolarCity. Instead, compare this deal to what happened in the creation of television after General Sarnoff, who ran RCA, bought what he renamed NBC.

The world already had radio (just as we already have combustion powered cars.) The conundrum was that nobody needed a TV, especially when there were no TV programs. But nobody would create TV programs if there were no consumers with TVs. General Sarnoff realized that both had to happen simultaneously – the creation of both demand, and supply. It would only be by the creation, and promotion, of both that television could be a success. And it was General Sarnoff who used this experience to launch the first color televisions at the same time as NBC launched the first color programming – which fairly quickly pushed the industry into color.

Skeptics think Mr. Musk and his companies are in over their heads, because there are manufacturing issues for the batteries and the cars, and the solar panel business has yet to be profitable. Yet, the older among us can recall all the troubles with launching TV.

Early sets were not only expensive, they were often problematic, with frequent component failures causing owners to take the TV to a repairman. Often reception was poor, as people relied on poor antennas and weak network signals. It was common to turn on a set and have “snow” as we called it – images that were far from clear. And there was often that still image on the screen with the words “Technical Difficulties,” meaning that viewers just waited to see when programming would return. And programming was far from 24×7 – and quality could be sketchy. But all these problems have been overcome by innovation across the industry.

Yes, the evolution of electric cars will involve a lot of ongoing innovation. So judging its likely success on the basis of recent history would be foolhardy. Today Tesla sells 100% of its cars, with no discounts. The market has said it really, really wants its vehicles. And everybody who is offered electric panels with (a) the opportunity to sell excess power back to the grid and (b) financing, takes the offer. People enjoy the low cost, sustainable electricity, and want it to grow. But lacking a good storage device, or the inability to sell excess power, their personal economics are more difficult.

Electricity production, electricity storage (batteries) and electricity consumption are tightly linked technologies. Nobody will build charging stations if there are no electric cars. Nobody will build electric cars if there are not good batteries. Nobody will make better batteries if there are no electric cars. Nobody will install solar panels if they can’t use all the electricity, or store what they don’t immediately need (or sell it.)

This is not a world of an established marketplace, where GM and Chevron can stand alone. To grow the business requires a vision, business strategy and technical capability to put it all together. To make this work someone has to make progress in all the core technologies simultaneously – which will continue to improve the storage capability, quality and safety of the electric consuming automobiles, and the electric generating solar panels, as well as the storage capabilities associated with those panels and the creation of a new grid for distribution.

This is why Mr. Musk says that combining Tesla and SolarCity is obvious. Yes, he will have to raise huge sums of money. So did such early pioneers as Vanderbilt (railways,) Rockefeller (oil,) Ford (autos,) and Watson (computers.) More recently, Steve Jobs of Apple became heroic for figuring out how to simultaneously create an iPhone, get a network to support the phone (his much maligned exclusive deal with AT&T,) getting developers to write enough apps for the phone to make it valuable, and creating the retail store to distribute those apps (iTunes.) Without all those pieces, the ubiquitous iPhone would have been as successful as the Microsoft Zune.

It is fair for investors to worry if Tesla can raise enough money to pull this off. But, we don’t know how creative Mr. Musk may become in organizing the resources and identifying investors. So far, Tesla has beaten all the skeptics who predicted failure based on price of the cars (Tesla has sold 100% of its production,) lack of range (now up to nearly 300 miles,) lack of charging network (Tesla built one itself) and charging time (now only 20 minutes.) It would be shortsighted to think that the creativity which has made Tesla a success so far will suddenly disappear. And thus remarkably thoughtless to base an analysis on the industry as it exists today, rather than how it might well look in 3, 5 and 10 years.

The combination of Tesla and SolarCity allows Tesla to have all the components to pursue greater future success. Investors with sufficient risk appetite are justified in supporting this merger because they will be positioned to receive the future rewards of this pioneering change in the auto and electric utility industries.

Why McDonald’s and Apple Investors Should Be Very Wary

Why McDonald’s and Apple Investors Should Be Very Wary

Growth Stalls are deadly for valuation, and both Mcdonald’s and Apple are in one.

August, 2014 I wrote about McDonald’s Growth Stall.  The company had 7 straight months of revenue declines, and leadership was predicting the trend would continue.  Using data from several thousand companies across more than 3 decades, companies in a Growth Stall are unable to maintain a mere 2% growth rate 93% of the time. 55% fall into a consistent revenue decline of more than 2%. 20% drop into a negative 6%/year revenue slide. 69% of Growth Stalled companies will lose at least half their market capitalization in just a few years. 95% will lose more than 25% of their market value.  So it is a long-term concern when any company hits a Growth Stall.

Growth StallA new CEO was hired, and he implemented several changes.  He implemented all-day breakfast, and multiple new promotions.  He also closed 700 stores in 2015, and 500 in 2016.  And he announced the company would move its headquarters from suburban Oakbrook to downtown Chicago, IL. While doing something, none of these actions addressed the fundamental problem of customers switching to competitive options that meet modern consumer food trends far better than McDonald’s.

McDonald’s stock languished around $94/share from 8/2014 through 8/2015 – but then broke out to $112 in 2 months on investor hopes for a turnaround.  At the time I warned investors not to follow the herd, because there was nothing to indicate that trends had changed – and McDonald’s still had not altered its business in any meaningful way to address the new market realities.

Yet, hopes remained high and the stock peaked at $130 in May, 2016.  But since then, the lack of incremental revenue growth has become obvious again. Customers are switching from lunch food to breakfast food, and often switching to lower priced items – but these are almost wholly existing customers.  Not new, incremental customers.  Thus, the company trumpets small gains in revenue per store (recall, the number of stores were cut) but the growth is less than the predicted 2%.  The only incremental growth is in China and Russia, 2 markets known for unpredictable leadership.  The stock has now fallen back to $120.

Given that the realization is growing as to the McDonald’s inability to fundamentally change its business competitively, the prognosis is not good that a turnaround will really happen.  Instead, the common pattern emerges of investors hoping that the Growth Stall was a “blip,” and will be easily reversed.  They think the business is fundamentally sound, and a little management “tweaking” will fix everything.  Small changes will lead to the  classic hockey-stick forecast of higher future growth.  So the stock pops up on short-term news, only to fall back when reality sets in that the long-term doesn’t look so good.

Unfortunately, Apple’s Q3 2016 results (reported yesterday) clearly show the company is now in its own Growth Stall.  Revenues were down 11% vs. last year (YOY or year-over-year,) and EPS (earnings per share) were down 23% YOY.  2 consecutive quarters of either defines a Growth Stall, and Apple hit both.  Further evidence of a Growth Stall exists in iPhone unit sales declining 15% YOY, iPad unit sales off 9% YOY, Mac unit sales down 11% YOY and “other products” revenue down 16% YOY.

This was not unanticipated.  Apple started communicating growth concerns in January, causing its stock to tank. And in April, revealing Q2 results, the company not only verified its first down quarter, but predicted Q3 would be soft.  From its peak in May, 2015 of $132 to its low in May, 2016 of $90, Apple’s valuation fell a whopping 32%!  One could say it met the valuation prediction of a Growth Stall already – and incredibly quickly!

But now analysts are ready to say “the worst is behind it” for Apple investors.  They are cheering results that beat expectations, even though they are clearly very poor compared to last year.  Analysts are hoping that a new, lower baseline is being set for investors that only look backward 52 weeks, and the stock price will move up on additional company share repurchases, a successful iPhone 7 launch, higher sales in emerging countries like India, and more app revenue as the installed base grows – all leading to a higher P/E (price/earnings) multiple. The stock improved 7% on the latest news.

So far, Apple still has not addressed its big problem.  What will be the next product or solution that will replace “core” iPhone and iPad revenues?  Increasingly competitors are making smartphones far cheaper that are “good enough,” especially in markets like China.  And iPhone/iPad product improvements are no longer as powerful as before, causing new product releases to be less exciting.  And products like Apple Watch, Apple Pay, Apple TV and IBeacon are not “moving the needle” on revenues nearly enough.  And while experienced companies like HBO, Netflix and Amazon grow their expanding content creation, Apple has said it is growing its original content offerings by buying the exclusive rights to “Carpool Karaoke – yet this is very small compared to the revenue growth needs created by slowing “core” products.

Like McDonald’s stock, Apple’s stock is likely to move upward short-term.  Investor hopes are hard to kill.  Long-term investors will hold their stock, waiting to see if something good emerges.  Traders will buy, based upon beating analyst expectations or technical analysis of price movements. Or just belief that the P/E will expand closer to tech industry norms. But long-term, unless the fundamental need for new products that fulfill customer trends – as the iPad, iPhone and iPod did for mobile – it is unclear how Apple’s valuation grows.

How Traditional Planning Systems Failed Microsoft, and Its Board

Last week Bloomberg broke a story about how Microsoft’s Chairman, John Thompson, was pushing company management for a faster transition to cloud products and services.  He even recommended changes in spending might be in order.

Really?  This is news?

Let’s see, how long has the move to mobile been around?  It’s over a decade since Blackberry’s started the conversion to mobile.  It was 10 years ago Amazon launched AWS.  Heck, end of this month it will be 9 years since the iPhone was released – and CEO Steve Ballmer infamously laughed it would be a failure (due to lacking a keyboard.)  It’s now been 2 years since Microsoft closed the Nokia acquisition, and just about a year since admitting failure on that one and writing off $7.5B  And having failed to achieve even 3% market share with Windows phones, not a single analyst expects Microsoft to be a market player going forward.

So just now, after all this time, the Board is waking up to the need to change the resource allocation?  That does seem a bit like looking into barn lock acquisition long after the horses are gone, doesn’t it?

The problem is that historically Boards receive almost all their information from management.  Meetings are tightly scheduled affairs, and there isn’t a lot of time set aside for brainstorming new ideas.  Or even for arguing with management assumptions.  The work of governance has a lot of procedures related to compliance reporting, compensation, financial filings, senior executive hiring and firing – there’s a lot of rote stuff.  And in many cases, surprisingly to many non-Directors, the company’s strategy may only be a topic once a year.  And that is usually the result of a year long management controlled planning process, where results are reviewed and few challenges are expected.  Board reviews of resource allocation are at the very, very tail end of management’s process, and commitments have often already been made – making it very, very hard for the Board to change anything.

And these planning processes are backward-oriented tools, designed to defend and extend existing products and services, not predict changes in markets.  These processes originated out of financial planning, which used almost exclusively historical accounting information.  In later years these programs were expanded via ERP (Enterprise Resource Planning) systems (such as SAP and Oracle) to include other information from sales, logistics, manufacturing and procurement.  But, again, these numbers are almost wholly historical data.  Because all the data is historical, the process is fixated on projecting, and thus defending, the old core of historical products sold to historical customers.

Copyright Adam Hartung

Copyright Adam Hartung

Efforts to enhance the process by including extensions to new products or new customers are very, very difficult to implement.  The “owners” of the planning processes are inherent skeptics, inclined to base all forecasts on past performance.  They have little interest in unproven ideas.  Trying to plan for products not yet sold, or for sales to customers not yet in the fold, is considered far dicier – and therefore not worthy of planning.  Those extensions are considered speculation – unable to be forecasted with any precision – and therefore completely ignored or deeply discounted.

And the more they are discounted, the less likely they receive any resource funding.  If you can’t plan on it, you can’t forecast it, and therefore, you can’t really fund it.  And heaven help some employee has a really novel idea for a new product sold to entirely new customers.  This is so “white space” oriented that it is completely outside the system, and impossible to build into any future model for revenue, cost or – therefore – investing.

Take for example Microsoft’s recent deal to sell a bunch of patent rights to Xiaomi in order to have Xiaomi load Office and Skype on all their phones.  It is a classic example of taking known products, and extending them to very nearby customers.  Basically, a deal to sell current software to customers in new markets via a 3rd party.  Rather than develop these markets on their own, Microsoft is retrenching out of phones and limiting its investments in China in order to have Xiaomi build the markets – and keeping Microsoft in its safe zone of existing products to known customers.

The result is companies consistently over-investment in their “core” business of current products to current customers.  There is a wealth of information on those two groups, and the historical info is unassailable.  So it is considered good practice, and prudent business, to invest in defending that core.  A few small bets on extensions might be OK – but not many.  And as a result the company investment portfolio becomes entirely skewed toward defending the old business rather than reaching out for future growth opportunities.

This can be disastrous if the market shifts, collapsing the old core business as customers move to different solutions.  Such as, say, customers buying fewer PCs as they shift to mobile devices, and fewer servers as they shift to cloud services.  These planning systems have no way to integrate trend analysis, and therefore no way to forecast major market changes – especially negative ones.  And they lack any mechanism for planning on big changes to the product or customer portfolio.   All future scenarios are based on business as it has been – a continuation of the status quo primarily – rather than honest scenarios based on trends.

How can you avoid falling into this dilemma, and avoiding the Microsoft trap?  To break this cycle, reverse the inputs.  Rather than basing resource allocation on financial planning and historical performance, resource allocation should be based on trend analysis, scenario planning and forecasts built from the future backward.  If more time were spent on these plans, and engaging external experts like Board Directors in discussions about the future, then companies would be less likely to become so overly-invested in outdated products and tired customers. Less likely to “stay at the party too long” before finding another market to develop.

If your planning is future-oriented, rather than historically driven, you are far more likely to identify risks to your base business, and reduce investments earlier.  Simultaneously you will identify new opportunities worthy of more resources, thus dramatically improving the balance in your investment portfolio.  And you will be far less likely to end up like the Chairman of a huge, formerly market leading company who sounds like he slept through the last decade before recognizing that his company’s resource allocation just might need some change.

Apple – The Sustaining Innovation March – What a Defend & Extend Strategy Looks Like

Apple – The Sustaining Innovation March – What a Defend & Extend Strategy Looks Like

My last column focused on growth, and the risks inherent in a Growth stall. As I mentioned then, Apple will enter a Growth Stall if its revenue declines year-over-year in the current quarter. This forecasts Apple has only a 7% probability of consistently growing just 2%/year in the future.

This usually happens when a company falls into Defend & Extend (D&E) management. D&E management is when the bulk of management attention, and resources, flow into protecting the “core” business by seeking ways to use sustaining innovations (rather than disruptive innovations) to defend current customers and extend into new markets. Unfortunately, this rarely leads to high growth rates, and more often leads to compressed margins as growth stalls. Instead of working on breakout performance products, efforts are focused on ways to make new versions of old products that are marginally better, faster or cheaper.

Using the D&E lens, we can identify what looks like a sea change in Apple’s strategy.

For example, Apple’s CEO has trumpeted the company’s installed base of 1B iPhones, and stated they will be a future money maker. He bragged about the 20% growth in “services,” which are iPhone users taking advantage of Apple Music, iCloud storage, Apps and iTunes. This shows management’s desire to extend sales to its “installed base” with sustaining software innovations. Unfortunately, this 20% growth was a whopping $1.2B last quarter, which was 2.4% of revenues. Not nearly enough to make up for the decline in “core” iPhone, iPad or Mac sales of approximately $9.5B.

Apple has also been talking a lot about selling in China and India. Unfortunately, plans for selling in India were at least delayed, if not thwarted, by a decision on the part of India’s regulators to not allow Apple to sell low cost refurbished iPhones in the country. Fearing this was a cheap way to dispose of e-waste they are pushing Apple to develop a low-cost new iPhone for their market. Either tactic, selling the refurbished products or creating a cheaper version, are efforts at extending the “core” product sales at lower margins, in an effort to defend the historical iPhone business. Neither creates a superior product with new features, functions or benefits – but rather sustains traditional product sales.

Of even greater note was last week’s announcement that Apple inked a partnership with SAP to develop uses for iPhones and iPads built on the SAP ERP (Enterprise Resource Planning) platform.  This announcement revealed that SAP would ask developers on its platform to program in Swift in order to support iOS devices, rather than having a PC-first mentality.

This announcement builds on last year’s similar announcement with IBM. Now 2 very large enterprise players are building applications on iOS devices. This extends the iPhone, a product long thought of as great for consumers, deeply into enterprise sales. A market long dominated by Microsoft. With these partnerships Apple is growing its developer community, while circumventing Microsoft’s long-held domain, promoting sales to companies as well as individuals.

And Apple has shown a willingness to help grow this market by introducing the iPhone 6se which is smaller and cheaper in order to obtain more traction with corporate buyers and corporate employees who have been iPhone resistant. This is a classic market extension intended to sustain sales with more applications while making no significant improvements in the “core” product itself.

And Apple’s CEO has said he intends to make more acquisitions – which will surely be done to shore up weaknesses in existing products and extend into new markets. Although Apple has over $200M of cash it can use for acquisitions, unfortunately this tactic can be a very difficult way to actually find new growth. Each would be targeted at some sort of market extension, but like Beats the impact can be hard to find.

Remember, after all revenue gains and losses were summed, Apple’s revenue fell $7.6B last quarter. Let’s look at some favorite analyst acquisition targets to explain:

  1. Box could be a great acquisition to help bring more enterprise developers to Apple. Box is widely used by enterprises today, and would help grow where iCloud is weak. IBM has already partnered with Box, and is working on applications in areas like financial services.  Box is valued at $1.45B, so easily affordable. But it also has only $300M of annual revenue. Clearly Apple would have to unleash an enormous development program to have Box make any meaningful impact in a company with over $500B of revenue. Something akin of Instagram’s growth for Facebook would be required. But where Instagram made Facebook a pic (versus words) site, it is unclear what major change Box would bring to Apple’s product lines.
  2. Fitbit is considered a good buy in order to put some glamour and growth onto iWatch. Of course, iWatch already had first year sales that exceeded iPhone sales in its first year. But Apple is now so big that all numbers have to be much bigger in order to make any difference.  With a valuation of $3.7B Apple could easily afford FitBit. But FitBit has only $1.9B revenue.  Given that they are different technologies, it is unclear how FitBit drives iWatch growth in any meaningful way – even if Apple converted 100% of Fitbit users to the iWatch. There would need to be a “killer app” in development at FitBit that would drive $10B-$20B  additional annual revenue very quickly for it to have any meaningful impact on Apple.
  3. GoPro is seen as a way to kick up Apple’s photography capabilities in order to make the iPhone more valuable – or perhaps developing product extensions to drive greater revenue. At a $1.45B valuation, again easily affordable.  But with only $1.6B revenue there’s just not much oomph to the Apple top line. Even maximum Apple Store distribution would probably not make an enormous impact. It would take finding some new markets in industry (enterprise) to build on things like IoT to make this a growth engine – but nobody has said GoPro or Apple have any innovations in that direction. And when Amazon tried to build on fancy photography capability with its FirePhone the product was a flop.
  4. Tesla is seen as the savior for the Apple Car – even though nobody really knows what the latter is supposed to be. Never mind the actual business proposition, some just think Elon Musk is the perfect replacement for the late Steve Jobs. After all the excitement for its products, Tesla is valued at only $28.4B, so again easily affordable by Apple. And the thinking is that Apple would have plenty of cash to invest in much faster growth — although Apple doesn’t invest in manufacturing and has been the king of outsourcing when it comes to actually making its products. But unfortunately, Tesla has only $4B revenue – so even a rapid doubling of Tesla shipments would yield a mere 1.6% increase in Apple’s revenues.
  5. In a spree, Apple could buy all 4 companies! Current market value is $35B, so even including a market premium $55B-$60B should bring in the lot. There would still be plenty of cash in the bank for growth. But, realize this would add only $8B of annual revenue to the current run rate – barely 25% of what was needed to cover the gap last quarter – and less than 2% incremental growth to the new lower run rate (that magic growth percentage to pull out of a Growth Stall mentioned earlier in this column.)

Such acquisitions would also be problematic because all have P/E (price/earnings) ratios far higher than Apple’s 10.4.  FitBit is 24, GoPro is 43, and both Box and Tesla are infinite because they lose money. So all would have a negative impact on earnings per share, which theoretically should lower Apple’s P/E even more.

Acquisitions get the blood pumping for investment bankers and media folks alike – but, truthfully, it is very hard to see an acquisition path that solves Apple’s revenue problem.

All of Apple’s efforts big efforts today are around sustaining innovations to defend & extend current products. No longer do we hear about gee whiz innovations, nor do we hear about growth in market changing products like iBeacons or ApplePay. Today’s discussions are how to rejuvenate sales of products that are several versions old. This may work. Sales may recover via growth in India, or a big pick-up in enterprise as people leave their PCs behind. It could happen, and Apple could avoid its Growth Stall.

But investors have the right to be concerned. Apple can grow by defending and extending the iPhone market only so long. This strategy will certainly affect future margins as prices, on average, decline. In short, investors need to know what will be Apple’s next “big thing,” and when it is likely to emerge. It will take something quite significant for Apple to maintain it’s revenue, and profit, growth.

The good news is that Apple does sell for a lowly P/E of 10 today. That is incredibly low for a company as profitable as Apple, with such a large installed base and so many market extensions – even if its growth has stalled. Even if Apple is caught in the Innovator’s Dilemma (i.e. Clayton Christensen) and shifting its strategy to defending and extending, it is very lowly valued. So the stock could continue to perform well. It just may never reach the P/E of 15 or 20 that is common for its industry peers, and investors envisioned 2 or 3 years ago. Unless there is some new, disruptive innovation in the pipeline not yet revealed to investors.