5 Reasons Why Wall Street Is Wrong About Apple

wallstreet

Apple disappointed Wall Street by announcing an iPhone 5C that isn’t cheap. As a result, Apple’s stock price took a hit.

That’s the polite way to say it. Let’s usher all the financial industry people out of the room so I can tell you the blunt truth. Ready?

Wall Street has systemic blind spots and institutional biases that make it incapable of appreciating where Apple is headed. And they demonstrated all that this week by focusing on all the wrong things.

In general, analysts were expecting a $400 iPhone 5C. But Apple announced one starting at $549 — not a budget or low-cost phone by any measure. Apple’s stock price dropped about 5% and stayed there.

Overemphasizing the wrong information — whether or not Apple would compete in the budget smartphone category — speaks volumes about Wall Street’s myopic, misguided and clueless understanding of consumer electronics and Apple’s role in it.

Here are the five reasons why Wall Street is wrong about Apple. 

1. Wall Street over-values measurable data

Unit sales and market share are perfectly measurable data points and Wall Street loves them.

It stands to reason that if Apple, a coveted brand, suddenly shipped a very low-cost phone that its unit sales and market share numbers would go through the roof.

Never mind that Apple’s current pricing strategy gives Apple most of the entire industry’s profits and that the hundreds of companies making nothing are using the low-cost approach Wall Street wants for Apple.

A huge reason for Apple’s success is a long list of unmeasurable and hard-to-measurable qualities that Wall Street doesn’t get.

For example, Apple is viewed in Asia and around the world as a luxury, aspirational brand. A cheap iPhone would tarnish that brand, erasing Apple’s difference in the market.

Another hard to measure attribute is the influence of iPhone owners. A great many celebrities and other influential people are die-hard iPhone fans in part because it’s a higher-priced status symbol.

And still another is that Apple’s pricing, marketing and positioning attracts a higher concentration of the kinds of people who spend more for apps, content, services and who at whom higher-end advertising can be aimed.

Diminishing the unmeasurables for the sake of measurables is Wall Street thinking, but not Apple thinking. In fact, the ability for a technology company to win on unmeasurables could be one definition of what makes a company visionary. Anyone can count beans.

2. Wall Street can’t think long-term

A super cheap iPhone fueled by the Apple-brand halo effect would have brought a huge jolt to unit sales and market share to be sure. But that tarnishes the halo for short-term gain.

One of the reasons public companies (like Microsoft) struggle is that shareholders force short-term thinking on companies. Instead of investing in the future and playing the long game, companies without visionary leaders short-term-think themselves into irrelevance.

Companies with visionary leaders — Amazon.com, for example — are able to push back and play the long game, and that’s why they win.

If you offer Wall Street a dollar today or ten dollars a year from now, they will always take the dollar and run.

3. Wall Street doesn’t appreciate irrational decision making around price

Behavioral economist Dan Ariely has written and spoken a great deal about how people make irrational decisions about pricing. But if you follow Ariely’s work, it’s clear that having a “cheaper” iPhone is almost as compelling as a “cheap” iPhone.

I’ll explain how this works with an oversimplified, hypothetical scenario. If you’re a middle-class Chinese smartphone buyer, your choice before (from an Apple-centric point of view) was a desirable, high-cost iPhone or a cheaper non-iPhone. This choice leads many to say, well, the iPhone is just too much of a luxury — I’d better get the Huawei.

But once Apple has their high-cost luxury iPhone, plus a second iPhone that’s $100 cheaper, a huge number of people are going to satisfy both their iPhone lust and their desire to avoid extravagance by choosing the 5C.

It’s an irrational buying choice, but that’s the point. Human decisions, especially around pricing, are irrational and easily influenced by strategically crafted options.

Wall Street assumes people make rational buying decisions. Apple understands that people do not, and that with strategic, savvy pricing, it can sell to the top segment of the budget market with a phone that really isn’t very cheap at all.

4. Wall Street doesn’t understand the power of Apple’s decommoditization branding strategy

Apple’s colorful new phones and colorful new operating system, and other attributes like the fingerprint reader and ultra high-quality camera, are decommotitization features. In the minds of consumers, Apple will be “more different” with the new colors and features.

Sure, Samsung is hard at work to build a gold smartphone. So will others. And Motorola beat Apple to market with a variety of wild colors. Others will jump on board, too.

But for awhile, Apple’s new phone look and feature set will help keep the copycats at bay for now, and more clearly differentiate Apple’s brand in the market.

5. Wall Street doesn’t understand Apple’s breathtaking plan to own identity, mobile wallets, eCommerce and more

Apple is going to kill it in the smartphone market for the next year at least. But the reason Wall Street should really be throwing money at Apple is what the company may achieve with the combination of Touch ID, iBeacons and its WifiSLAM acquisition  — an opportunity I wrote about this week on another site.

In a nutshell, Apple is placing itself in the position to get micropayments from billions of online and retail transactions by authenticating the user for purchases, facilitating location-based marketing and replacing the cash register with Bluetooth-based point-of-sale.

The breathtaking fact about all this is that Apple has first-mover advantage, even though Apple is not the first-mover. They did this by building the system on Bluetooth Low Energy, a technology that has been in Apple laptops since 2011 and in all phones since the iPhone 4S. They simply throw a switch, and 200 million users are good to go — no waiting for NFC chips.

Wall Street downgraded Apple on the news this week. But that’s not because they understand something Apple does not. It means that they don’t understand Apple’s direction at all.

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  • Bulldogger123

    Great article.

  • Adrayven

    Good article.. This is not just an issue with Apple, WS has a real issue with long term vision. It’s become a micro-traders market from one millisecond to another. Ironically, I think twitter and Facebook impact many trades more than any form of rational experience. Its a very frightening russian roulette game.

  • robogobo

    As long as Wall Street continues its pyramid scheme of analyst-picks followed by a rush of buy or sell behavior, share price will never reflect true performance. Apple is the greatest example of this.

  • Steven Quan

    But Carl iCon understands Apple’s vision very well! He eats lunch with the Cookster all the time and gets his tidbits on the company’s future plans.

    And what’s with #3?? How is buying the 5C an irrational decision? Some people put a cover over it and could care less what it looks like and don’t care about the fingerprint either. If it saves them $100 it totally makes sense to buy the 5C. Saying that people don’t make rational decisions when buying their smart phones is actually a slap in the face to all the iPhone users out there.

    I have been using Android for the past 2 years now and I made a rational and conscious choice the buy the iPhone 5. It wasn’t out of emotion.

  • Steven Quan

    Don’t understand all the blustering about Apple remaining a premium brand for smart phones. Why don’t these people knock on Ferrari’s door and ask them to make a sports car for less than $25,000? I’m sure they would sell a lot of Ferrari’s at that price point. And while you’re at it why not ask Saks 5th Ave to come up with a clothing store where they sell shirts for less than $10.

  • Alexander530

    Very informative and sensible article. I actually share the same thoughts as the writer of this article. Apple and Wall Street are two different entities with different views as to how things should be. Wall Street has their own mysterious and convoluted formula on how they value a company. While Apple has their own business principles to uphold. Wall Street will not reinvent their wheel just to accommodate Apple’s principles, and neither will Apple budge so to win Wall Street’s favor. They just need to do what they need to do. As for consumers, we’ll just buy the product that we want to buy.

  • HerbalEd

    Wall Street has it’s head way up its butt. You are so right on. Wall Street has many times shorted Apple because they simply don’t understand Apple.

    iBeacon is the wild card here. Apple’s said very little about it and very few know about it. I have to laugh at all the nay sayers … including Apple fans … who’ve chided Apple for not going with NFC … and now we see why. NFC is going to die in its infancy.

    Now’s a great time to buy Apple stock.

  • HerbalEd

    But Carl iCon understands Apple’s vision very well! He eats lunch with the Cookster all the time and gets his tidbits on the company’s future plans.

    And what’s with #3?? How is buying the 5C an irrational decision? Some people put a cover over it and could care less what it looks like and don’t care about the fingerprint either. If it saves them $100 it totally makes sense to buy the 5C. Saying that people don’t make rational decisions when buying their smart phones is actually a slap in the face to all the
    iPhone users out there.

    I have been using Android for the past 2 years now and I made a rational and conscious choice the buy the iPhone 5. It wasn’t out of emotion.

    I think the key word here is “emotional” not “rational” … although the two are often related. A lot of people … including myself … often make buying decisions from an emotional/feelings/gut place … and that ain’t necessarily a bad thing. Hell, it’s my money and my desire and my money, so I’ll buy whatever I want and screw whoever says it ain’t rational. I like Apple products. I like their history, their style, their founders. I’m a loyal fan and I’m sticking with my pals.

    There are also hundreds of millions of people out there who can’t easily afford an iPhone … and rational or irrational … they aspire to an iPhone and it now appears that there is one they can finally have. Yes, it’s expensive (for them) but it is “cheaper” and so maybe now’s finally the time to buy and be Apple cool.

    You can call it what you want … Apple sheep, or whatever. But Apple know very well how it works and they’re masters at it. Wall Street is a fool if it thinks Apple is/was going to create a “cheap” iPhone. Silly buggers.

  • Jdsonice

    The problem is that Wall Street cannot see beyond tomorrow. They value crap over substance. It was not surprising that they did not “like” Apple’s new phones. Remember the word Analyst starts with Anal.

  • HerbalEd
    I have been using Android for the past 2 years now and I made a rational and conscious choice the buy the iPhone 5. It wasn’t out of emotion.

    I think the key word here is “emotional” not “rational” … although the two are often related.

    Oops. I meant to say in the above”irrational” instead of “rational”.

  • honourbound68

    1) i don’t know about you as an investor, but “measurable data” is VERY IMPORTANT to me as an individual investor. yes Apple is seen as a luxury brand (it’s not a frickin Ferrari), but even Mercedes sells an affordable model – and IT’S STILL A MERCEDES. we all know that the iPhone line of phones have the HIGHEST markup in the cell phone industry. if Apple sold a $400 dollar phone, it WOULD increase market share. would it dilute the brand, I sure as hell doubt it. there have been many studies that show that WHEN consumers buy a luxury item, it’s a gateway for other luxury purchases (possible explanation for why Apple user have more paid apps than Android users). btw, at $400, Apple would still have at least $180 profit based on the reported cost of manufacturing an iPhone.

    2) wall street CAN think long term but YES they’re a bunch of greedy bastards. What they’re looking for is a reason for AAPL to climb back to the stock prices of 2012 and introducing the iPhone 5c wasn’t it. and why would the gains be short term??

    3) that’s just plain dumb. the iPhone 5C is VIRTUALLY the iPhone 5 in a different body. it occupies the same price point the 5 WOULD HAVE HAD. Apple isn’t expanding into a new market economic level at all with this move.

    4) new colors & features? windows phones have been coming out in different colors for a while now.. fingerprint reader… hello Motorola Atrix which is a 2 year old phone?

    5) i actually agree with you on with Apple’s positioning with micropayments.

    the bottom line is this. wall street looks at results and if they can’t see how AAPL is going to INCREASE the money rolling in without doing anything different (new products, different price points, new revenue streams) then it will downgrade the stock. it’s not a reflection on how profitable the company is because we all know AAPL is very very profitable. it’s a reflection on HOW MUCH MORE profitable they believe the company WILL BE.

    btw. from reading most of the comments below, it seems that a lot of people don’t understand wall street. and the comment about facebook and twitter affecting stock price movement is just plain wrong. just think on this… the market is moved by institutional investors (mutual funds, banks, investment firms, yada yada yada). it takes a long time for any of them to establish or remove a position in a stock because of the amounts of money involved. the money managers would be idiots to be swayed by facebook posts or tweets unless they were verifiable and factual. i sincerely doubt that they even have time to read them….

  • rcloud

    I’d add one more point that the Wall Street pretend they know about Chinese consumers. The Chinese people who can afford smartphones want everything BUT cheap! Status, status, status!! Don’t the wall st and the rest of world know by now how Chinese spending their money? , 4000 yuan is nothing for those want the best for themselves or their children but status is. Xiaomei – means small rice maybe cheap but no one seems heard of it here in China. As an investor, I don’t want my apple cheap, as an user I want the best!

  • Steffen Jobbs

    Those Wall Street analysts are nothing but crooks and shysters. The busted their asses to change Apple’s target prices and market calls before even one iPhone gets into the hands of the public. All those analysts were doing were making an assumption based on what they feel the iPhone 5c should have been priced. Since when do they know the smartphone market better than Apple. Why does market share and cheap products count far more than profit share? If Wall Street is running a financial business then why are unit sales numbers so important if they don’t necessarily lead to profits. There are far too many biased analysts who just naturally have a pessimistic view of whatever Apple does. They think they know everything about the future despite how wrong many of them have been in the past regarding Apple. There’s nothing Apple shareholders can do about it but can only hope those analysts get chopped in the neck as they misguide their clients either by flat-out lies or just plain stupidity.

    Everything Apple does seems to be seen as the wrong move and every product they introduce knocks Apple’s share price further down. It honestly doesn’t make sense to condemn a product’s chances of sales before it goes on sale. All I can hope is that Apple iPhone sales go through the roof and demand for both iPhones become insatiable. Those hedge fund idiots are all about selling cheap disposable products to consumers. They love crap over substance because it puts money in their pockets so much faster. It’s no wonder America’s economy is messed up with people like that pulling all the strings. I hate the idea of Apple selling cheap products, but I know that I’ll probably never get to see Apple’s share price up in stars like Google and Priceline or have have high shareholder value like Netflix and Tesla. Wall Street hates Apple and especially Tim Cook so Apple shareholders will continue to be totally screwed.

  • PeterMac1607

    The first thing Steve Jobs did when he returned to Apple was end the licensing of the Apple IOS. Apple is a closed system which is it’s strength. You have to laugh at the ads for the Surface Tablet – it’s aimed at users who want a tablet that functions as a Windows laptop??

    The negative Wall Street reception of the roll out was not too surprising, many stock traders make money off of volatility – the up and down swings of stock- and Apple is one of the most highly traded stocks. To my mind when Apple dips that’s a good time to buy. I look forward to them eating their words ,but I doubt that will happen. — great article and the companion article on point of sale technology was eye opening, most analysts thought the fingerprint technology was a gimmick — people fear what they can’t understand.

  • ShawnCBatey

    as Sean replied I’m impressed that anyone able to earn $5816 in 1 month on the computer. additional hints….. http://www.jobs25.com

  • smsgia

    if anything… Apple failed to ‘stop’ rumors that C stands for ‘cheap’… but then it wouldn’t be apple’s style if it did. Anyone who thinks apple will sell cheap products is illusional. You don’t hire former YSL CEO then sell cheap products.

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Mike ElganMike Elgan writes about technology and culture for a wide variety of publications. Follow Mike on Google+, Facebook and Twitter.

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