Jan. 24, 2013 at 5:43 PM ET
Somebody pass Apple the remote — Wall Street wants the channel changed.
Skittish investors sent Apple stock down 12 percent Thursday, one day after the computer giant’s quarterly revenue came in below estimates, and some analysts worried that weaker demand for its products was an indication that the company’s innovative prowess died with former CEO Steve Jobs.
In any other context, the idea of punishing a company that delivered an 18 percent year-over-year increase, bringing quarterly revenue to $54.5 billion, would be absurd, but Apple, in a way, is a victim of its own success. Investors now expect the company to come in and reinvent entire practices and product categories, as it did with listening to music and cell phones, and they expect the next candidate for an iMakeover to be the television.
“We don’t think the old game plan is working,” Keith Bachman, analyst at BMO Capital Markets, wrote in a research note Thursday, lowering his 12-month target price from $640 to $580.
While analysts tend to have more or less a clear consensus about the hurdles to entering the television market, they’re not unified around a clear idea of what "Apple TV" would come to mean. Whether or not they believe Apple management has a vision and the means to execute it shape their longer-term view of the company’s future.
“If products we hoped for like an iOS-based TV, and significant enhancements to platform components like Siri and iCloud don’t appear to be in store for 2013, we would lose confidence in the pace of innovation at Apple,” Goldman Sachs analyst Bill Shope wrote, lowering his 12-month target price from $760 to $660.
Analysts also voiced more prosaic, near-term concerns in response to Apple’s report and forward-looking guidance: A faster timeline for introducing new products and a slate of offerings that includes cheaper devices both could eat into Apple’s profit margin. “I think that the challenge of the company would be present today with or without Jobs,” Doug Kass, president of Seabreeze Partners Management, said in an interview with CNBC on Tuesday.
But these factors wouldn’t matter as much if Wall Street believed that Tim Cook has the Next Big Thing up his sleeve. On the subject of TV, Cook was emphatic but vague on yesterday’s conference call. He touted the two million-plus unit sales of the Apple TV set-top box and told analysts, “I have said in the past this is an area of intense interest for us and it remains that, and I tend to believe that there is a lot we can contribute in this space.”
In an interview with NBC’s Brian Williams in December, Cook also expounded on TV, saying, “It’s a market that we see that has been left behind.”
“It’s definitely the next area where investors are looking in terms of innovation,” said Brian Colello, a senior equity analyst at Morningstar.
The TV industry doesn’t necessarily need — or want — Apple, though. “The difficulty is that the vast majority of TV content is owned by a small handful of companies who’s primary business model is bundling and cable [and] satellite distribution,” Andy Hargreaves, an analyst at Pacific Crest Securities, said via email. “Those companies have little interest in contributing content to a service that could disrupt their primary business model.”
When Apple reinvented the way we listen to music, it presented the ailing record industry with a solution to flagging sales and rampant piracy. When it turned the smartphone from an executive tool to a go-everywhere gadget, mobile carriers came around to the realization that they could create a whole new revenue stream by selling data plans to casual users.
Today, Americans have more choice than ever when it comes to their TV-viewing habits: They can digitally record a show to watch later, access streaming content from sources like Hulu or Netflix, get premium sports or movie content via subscriptions stacked onto their cable bundle and so on.
It’s a jumble of options that can be hard to sort and search through, and often requires juggling multiple remote controls and services. Smart TVs that attempt to corral this overflow of content are on the market, but they’re not user-friendly enough to be appealing to the masses, Colello said. “There have been some improvements but nothing is seamless yet, so Apple has an opportunity to close the door and make that a seamless interface,” he said.
Gene Munster, an analyst at Piper Jaffrey, also thinks a focus on TV content delivery could be Apple’s silver bullet. “The question is, how can Apple improve the user experience without disrupting the amount of money the content providers are making,” he said. “They can do things around content that can make the experience much different,” he said. In theory, a viewer only would have to go to a single platform and use one, intuitive remote control — maybe one that understands plain English — to search for or schedule shows to watch.
Munster thinks Apple plans to go beyond the set-top box. “Our feeling is, and we feel strongly about this, is that it’s an actual television... given Apple’s DNA of design as a feature, plus the only way to truly fix the remote control problem is to put it all in one panel,” he said.
Trip Chowdhry, managing director of equity research at Global Equities Research, suggested Apple could make use of new display technology to develop TVs with “ultra” or “4HD” high-definition resolution.
It’s an intriguing idea, but Colello said Apple doesn’t have the luxury of time on its side. “Apple does not have several years to do this,” he said. “I think the stock tells you that investors are antsy already.” TV is the best category for Apple to redeem itself with a new blockbuster, he said. “It would be an important signal after Steve Jobs’ passing that innovation still exists at the company.”