When it comes to large corporations, I am rarely disappointed. That is not because all companies are wonderful corporate citizens whose moral and ethical stance on issues can be applauded, it is simply because I understand what a company is. It is, at heart, an organization with one purpose: to make money.
Expecting a corporation to make decisions that restrict its ability to perform that most basic function in order to comply with a moral code that others think should apply is at best naïve. It did not, therefore, surprise me to learn that Apple (AAPL) were slowing down older phones, nor is it a shock that they have not made proactive moves to restrict the use of their products by children.
For investors, of course, what matters is will those and other similar stories affect the company’s stock price?
So far, as the 1 Year chart below shows, the answer is no. What the market understands is that things like innovation, great products that people want to buy and use, good marketing, and strong management have longevity. The news cycle and the exaggerated outrage of a large corporation’s critics do not.
For proof look no further than the fact that “batterygate,” or whatever you want to call it, is already old news after just a couple of weeks. The thing is, a corporation as massive and cash-rich as Apple can deal with these situations as they arise, and at a relatively small cost.
Their response to the battery story at first seemed to be incredulity. Yes, they said, of course we slow down your phones, but it is done to help you. A battery’s effectiveness inevitably declines with age, and what Apple was trying to do, they said, was offset that to some extent. A rational analysis would suggest that makes sense, but what the story did was highlight the fact that battery replacement in an iPhone is not just a matter of opening a compartment. So, Apple dropped their charge for providing that service by $50 to $29 and made a few other changes, as detailed here.
In many ways the “phone addiction” story has the capacity to be more impactful than slowing phones, mainly because it came as the result of a request by some large investors. CalPERS joined with activist investor Jana Partners to request that Apple fund a study into screen addiction among children, and provide software that makes it easier for parents to restrict their children’s screen usage.
So far, Apple’s response has been to make some calming noises and, given the company’s record of taking these kinds of things somewhat seriously, real action would be no surprise.
From a small stockholder’s perspective, the thing to remember is that Apple will take that action not just because it is the right thing to do, but also because they can afford it. They have made over $48 billion in the last year, have over $74 billion of cash on hand, and a market cap that is rapidly approaching $1 trillion. In that context, spending a few hundred million to fund a study and develop a software tweak, and in doing so further re-enforce the company’s image as a good corporate citizen, looks like a bargain.
CalPERS is big, but Apple is bigger. When their and Jana’s holdings are combined the come to around $2 billion, but that represents around 0.2% of the float. Add in Apple’s role in California as an employer and taxpayer and any response to the letter looks more like a genuine desire to “do no harm,” as Google (GOOGL) founders famously stated as their mission, than something that was forced on them.
Magnanimity and socially-conscious actions are a lot easier when you have enormous wealth.
Inevitably, as one of the most successful corporations in the history of mankind, Apple will always have critics. Despite in many ways not having to, they have shown a willingness in the past to listen to those critics and act, but acting on the resulting news stories is not what investors should do.
They should look instead at the fact that Apple has year-on-year quarterly earnings growth of 18.9% and a profit margin of over 21%, but is still available at a discount to the broader market, in terms of both forward (14.41) and trailing (18.93) P/Es. The stories will come and go, and the outrage will ebb and flow, but Apple will keep doing its job and making increasing amounts of money. For as long as they do that, the stock will remain a good investment.