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Shorting Apple

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Selling Apple short has become a quick way to grab headlines.

When you're one of the world's largest and fastest growing companies, you're one big bulls-eye. These past several weeks that fresh reality has helped fuel a high stakes narrative game, turning Apple into a case study for how interested parties frame a story for a distinct end -- in this case driving down a company's stock.

Like countless other Americans, I own Apple stock and want the company and stock to succeed. A long time ago I was the first news editor of Mac Week magazine, and recently wrote here about the changing dynamics the company faces (Apple's Goliath Effect). But I wouldn't pretend to predict which direction this or any other stock is headed. What I do understand is narrative and innovation: I've written my share of stories, including two popular books about innovation with IDEO, the leading innovation and design firm.

Selling Apple Short narratives fall into three basic categories.

The Achilles Heel

The Achilles Heel story revolves around the hero who uncovers some previously secret financial weakness that foreshadows doom. Enter analyst Walter Piecky of BTIG. Piecyk cut Apple to hold from buy on April 9th the day before it closed at a high of $639.93. His main rationale was what he forwarded as Apple's Achilles Heel -- his theory that wireless carriers will rebel and stop subsidizing the high cost of iPhones, and dramatically reduce Apple's revenues.

So what happened?

Apple sold 35.1 million iPhones during that second quarter. Sales in China tripled from a year before, reaching $7.9 billion. Quarterly revenue was $39.19 billion, up from $24.67 billion a year before. "It was an incredible quarter in China," Timothy D. Cook, Apple's chief executive, told Wall Street analysts in a conference call. "It is mind-boggling that we could do this well."

But those fabulous earnings came more than two weeks after Piecyk's Achilles Heel narrative. And on the eve of those tremendous earnings, April 24, 2012, Apple's stock had fallen to $562.61.

Many saw Piecyk as a genius. He'd brilliantly anticipated a huge correction on the hottest stock in the world. Few seemed to notice that Piecyk's "carrier subsidy" argument had not materialized or even been remotely relevant. Or that Piecyk (and just about every other analyst) had failed to anticipate the phenomenal sales growth in China or the stunning fact that Apple generated 64 percent of its revenue from international sales, the narrative strands that would matter most for the present and future of the company.

On April 25th, the day after the earnings were released, Apple's stock leapt more than 8% to $615.64 based on those phenomenal sales. But Piecyk remained a genius. How could this happen? His carrier myth spun viral in the instantaneous, anything goes, "news" world of the Internet. More blogs critical of Apple piled on, and the company's stock would dive again two days later. The plunging stock became proof of concept. Piecyk had after all correctly called or influenced a massive correction in the stock. His Achilles Heel narrative was now the stuff of legend.

The Parabolic Curve

Around the same time another popular narrative emerged -- The Parabolic Curve. This narrative appeared to make sense on many levels. First, it was a visual metaphor that people could understand - the soaring line on the Apple stock chart. From January to April, Apple's stock climbed spectacularly -- more than 50 percent. Regardless of what you think about the company or its stock, there's a business concept called profit taking and shorting. Apple's phenomenal rise during the first months of 2012 guaranteed that the stock would come down fast. What never made sense were the analysts who equated the curve with Apple's long-term business prospects. The stock price (and curve) on any given day is not the company. Apple's business is a real, tangible thing, and while the Parabolic Curve Narrative likely influenced many to sell, that's a totally separate thing from the health of the company.

They Can't Continue Forever

This narrative has been the bread and butter of hedge funds that recently bought, sold for great profit, and then shorted Apple. A key argument has been that Apple has lost Steve Jobs, its visionary hero. This narrative conveniently ignores that innumerable companies continue to be great after the founder dies. Or that Sir Jonathan Ive, Apple's lead designer for the iPhone, and iPad, and countless other products, has enormous operational control at Apple and we'll likely be seeing the fruits of his genius for a few more years. Jobs, for instance, told his biographer Walter Isaacson that nobody at Apple can tell Ive what to do: "that's the way I set it up." On a deeper level, this is the non-thinking "God is gone," universal rebuttal to Apple's extraordinary success. The non-thinking argument goes that since Jobs isn't there anymore every other tangible proof of existing and future success must be thrown out the window.

The They Can't Continue Forever often also compares Apple to companies that flew high and fell hard -- i.e., Microsoft, Cisco -- ignoring the fact that these behemoths never inspired the vast international brand fever of Apple. Jobs' brilliance was to appeal to individual aspirations. It's no accident that Apple last year became the top US retailer per square foot, and that the Apple Store on Regent Street in London sells more per square feet than any other shop in London. That explosive trend is just taking hold internationally, especially in booming new markets like Asia. No other technology company approaches the brand mania of Apple fans.

But the They Can't Continue Forever crowd conveniently acts as if this reality doesn't exist. They simply make the bald assertion that Apple's extraordinary success can't possibly last as if "nothing lasts forever" was a valid argument in a business world where Apple is believed to have at least three to five years of future products lined up.

Much of this, of course, may be directly related to how major players (hedge funds, short sellers, etc.) seem to intentionally sway the stock market for personal gain. Take for example, last week, when the hugely successful DoubleLine Capital Chief Executive Jeffrey Gundlach trotted out the They Can't Continue Forever cliché "the genius isn't there anymore." Surprise, surprise, Mr. Gundlach also announced that he had shorted Apple's shares. He rationalized that move with what the media dubbed his one simple soundbite: "I just wonder how many people will queue up around the block for an iPad 87."

Nobody is my guess. Gundlach is smart enough to know that Apple's success has come from its ability to constantly reinvent itself, and that his "iPad 87" wisecrack is about as valid as saying a decade ago that BMW customers would cool to buying the automaker's latest BMW 3 series (They've been making them since 1975 -- six generations and five different body styles -- and while we're on the subject of genius, BMW's brilliant founders died decades ago and the innovation and brand continues to grow). And you can say the same thing about Thomas Edison and his light bulb. A company 120 years later we call GE.

Skimpy narratives and major short bets seem to go together like biscuits and gravy. The bigger the short, the louder the shouting. This is less about sincere analysis and more about old-fashioned fear mongering. Negative blogs and trash talking designed to frighten the vulnerable public into impulsively selling a stock often lack a solid foundation.

Of course, there's truth to the platitude that no company can rest on its laurels. But that's why in the past decade Apple has introduced three revolutionary products that seemingly had little to do with its first two decades -- iPods, iPhones and iPads, reinventing how we experience music, telephony and reading and television. Apple will likely reimagine a few more. Perhaps iPay, a rumored digital payments solution that may arrive as early as the fall rollout of the "new iPhone," or a breakthrough television or some other iconic device or service in time for the holidays.

Radical Evolution

The Apple product narrative has been pretty darn consistent -- constant evolution through radical innovation. Apple is furiously evolving, and in ways that outsiders seldom anticipate. Consider this half-decade snapshot. As recently as January 8, 2007, Apple just made computers and iPods. But in the five years since then Apple has introduced the two most dominant high tech products in history. The company's pace of innovation is accelerating. The iPad, introduced just a little more than two years ago, is expected to grab 61 percent of worldwide tablet sales this year (126 million tablets are expected to be sold this year and 200 million in 2013) .How many other companies have dominated a brand new product category worth tens of billions a year in a scant two years?

Apple has succeeded by ruthlessly mapping out and designing genuinely new products and services for individuals. Meanwhile the imperial minded enterprises that ignored design and customers and slavishly catered to corporate mediocrity -- Think Rim and Nokia -- are fighting for their survival. Even Dell has become irrelevant, while the once mighty Hewlett Packard is rumored to be considering laying off 30,000 employees. What the Selling Apple Short narratives share in common is a lack of perspective. Yes, Apple's stock has slumped back from the 600's to the 500's, but at this writing, RIM was trading at a paltry $11 a share, Dell under $15, HP below $22, and Nokia barely breathing at $3. Apple's market capitalization is more than 11 times that of Hewlett Packard. It's also twice that of Microsoft and more than Poland.

But Apple's stock price this week or next year is not really the big story. This is a firm that has proven the tremendous value of design and innovation on a global scale. Yes it does have serious competitors in Samsung and Google. But what the Selling Apple Short narratives leave unsaid is that Apple was among the first to understand the following truth: What matters to most of us is our creativity and productivity, and frankly who wouldn't pay a little more to be smarter? Hundreds of millions of people are throwing off the traditional shackles of corporations, the traditional 9 to 6 workday, the stifling office, and the old limits of time and place. We're hurtling into an intensely mobile and visual world.

This is about far more than machines. We have a visceral desire to connect with other humans, movements, ideas and images. Argue all you want whether we are too consumed by our gadgets and screens but the impulse seems unstoppable. So far no other company on the planet approaches Apple's skill at crafting these portals to other worlds.

That's priceless.

Jonathan Littman is the founder of Snowball Narrative and co-author of The Art of Innovation and Ten Faces of Innovation.