NEW YORK (TheStreet) -- On July 22, during Apple's (AAPL - Get Report) third-quarter earnings report, CEO Tim Cook responded to a question by Bill Schope of Goldman Sachs about the long-term market for the iPad, competitive landscape, and the next driver for renewed growth.
Cook said: "We feel that there is significant innovation that can be brought."
On hearing that, it's easy to jump to conclusions. It's always tempting to think in the short term, with high hopes, even when an Apple CEO is talking about the long-term competitive landscape. Cook often speaks in a code that must be interpreted. I'll try to explain.
Mini Leaps and Micro Bounds
As we've seen, iPad technology development has moved along incrementally, and so Cook is really suggesting that significant innovation will take time. Apple's powerful ability to develop technology incrementally will accumulate and pay off in the long run.
That notion goes a long way towards explaining the relatively mild improvements observers are expecting for what's being called the "iPad Air 2." For example, John Brownlee at Cult of Mac recently wrote, concerning some leaked photos:
Otherwise, the iPad Air 2 looks like it will look nearly identicaly to its predecessor, which is not much of a surprise: at a minimum, Apple generally only redesigns the physical look of its devices substantially every two years. The earliest we can expect a radical iPad Air redesign is 2015."
The point here is that when we finally see the iPad Air 2, with incremental improvements, we shouldn't reel back in horror that it is incapable of striking a mortal, technical blow to the competition. What's important is the additive effect of gradual innovations over the long term -- when done right.
The Drool Factor
What's more important than whether any single feature makes it into the blend is the aggregate effect. Does the sum of the features make the iPad Air 2 attractive enough that customers with older models will be moved to upgrade? Is the drool factor satisfactory? Given the current product mix in the field and the features of the new model, is a global customer embrace to be expected? Apple has a knack for gauging those effects.
Another factor to consider when looking for growth is to evaluate what the prospects are for replacing the older iPads sold into education markets with the previous generation iPad Air. Can it be sold with enough margin and in sufficient numbers to also contribute to sales growth?
But what if something goes wrong with the sales predictions?
My instincts tell me that when Tim Cook talks about "significant innovation," he's also aware of special R&D efforts towards a quantum leap. We've had glimmers of this thanks to supply chain leaks of a 12.x inch iPad, big enough for multiple windows, and announced iOS extensions that allow data sharing and better content creation.
That's so strong a combination that it would fundamentally alter the tablet experience. Apple typically moves towards such a goal by refining the pieces before they're all married together, and so we don't always recognize them in isolation.
Cook speaks in extremely measured tones. Seldom is it possible to take what he says at face value without insights into how Apple works. Long term, "significant innovation" doesn't mean short-term flash in the very next product cycle.
At the time of publication, the author was long AAPL, although positions may change at any time.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate APPLE INC (AAPL) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and solid stock price performance. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Despite its growing revenue, the company underperformed as compared with the industry average of 8.9%. Since the same quarter one year prior, revenues slightly increased by 6.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Although AAPL's debt-to-equity ratio of 0.26 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.18, which illustrates the ability to avoid short-term cash problems.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Computers & Peripherals industry and the overall market, APPLE INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
- 44.56% is the gross profit margin for APPLE INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 20.69% is above that of the industry average.
- Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 47.87% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, AAPL should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- You can view the full analysis from the report here: AAPL Ratings Report