At a recent conference I heard a presentation by Scott Galloway, NYU marketing professor and founder of L2, a think tank.
He made a very compelling case, namely that Apple is a “great company in a bad neighborhood.” What he meant by that is that its fundamentals are amazing — terrific earnings, huge amount of cash on hand, and several lines of business that would each independently become Fortune 500 companies were they to be spun off. But the company doesn’t get the respect it deserves: its valuation, relative to these fundamentals, is very weak. In short, the market is valuing its stock as a “tech stock.”
Compared to other companies with similar reputation and fundamentals, Apple is getting a raw deal. Specifically, compare Apple’s ridiculously low P/E ratio of ~14 to LVMH (~21), Michael Kors (~31), Tiffany & Co (~62) and other high-end fashion and lifestyle brands, and you’ll see that Galloway’s assertion is essentially correct.
The strategy that Apple is undertaking is to reposition the company away from being valued as simply a very good tech company that also happens to have aspirational brand appeal and instead as the world’s most valuable fashion and lifestyle company that provides fashionable, attractive technology through its ecosystem of compatible products.
It’s a subtle shift, but one that could stand to increase the valuation of the company by several multiples. Because based on the fundamentals, the markets are currently undervaluing Apple’s upside. They should be able to achieve a higher valuation by putting greater emphasis on the emotional brand value.
Apple has so far undertaken these steps to shift itself into a fashion and lifestyle brand, but this is just the beginning:
- The Gold iPhone 5S: a desirable product with a “bling” factor. This became a hotly sought status symbol on its introduction.
- Hiring Angela Ahrendts from Burberry: ostensibly a play related to its stores, but Galloway calls this “the greatest head-fake in corporate history.” She’s there to bring Burberry-style intangible brand value to the retail experience and to the company.
- Announcement of 7:1 stock split: This is a signal from Apple that it intends to multiply the value of its stock by as much as 7 times. (This is supported by the fact that a 7:1 split puts the ~$700 all-time high pricepoint at a new, psychologically more palatable level of just $100.) That’s a tall order if it was based solely on marginal gains in the stock’s current “neighborhood.” This is a signal that the “movin’ on up” strategy is underway.
- Potential acquisition of Beats Audio: people will argue whether their headphones or their streaming music service are useful, but arguably neither of these things matter. Beats brings with it the cachet of the music industry, Dr. Dre, and a large customer base. But most importantly, Beats figured out how to do something that Apple is trying to do: assign an intangible brand value and price point to what otherwise might be a commodity product.
Many have asked why Apple needs Beats at all. Apple could, if it wanted to, make truly excellent headphones, and it of course already has a streaming music service. But it would take a tremendous amount of work to build the brand value that Beats has accrued for that line of business. And Beats would still be on the market for another competitor to snap up (like Samsung or HTC).
Taken in itself, a Beats acquisition may not seem to make much sense. But it is perfectly aligned with a strategy to transition Apple into a high-end, aspirational fashion and lifestyle brand. Whether or not you think Apple can (or should) execute such a strategy is up to you, but microanalyzing the Beats deal around current product attributes misses the point. This is about the stock and pricing and brand value. I rate Apple a strong buy.
(Disclosure: I own a tiny bit of AAPL.)