Program Blog

Innovate or Decline: Stock Prices Tied to Innovation

Posted by Robert Boehner on Sep 9, 2015 8:19:00 PM

Robert Boehner

Apple's market cap of over $600 billion is by far the highest stock valuation in the world.  This valuation has been driven by Apple's success in new product development, particularly with the iPhone family, which represents over 60% of Apple's profits.  Historically, a substantial new product innovation premium has been priced into Apple's valuation.

Apple's stock price has been under pressure recently.  Apple reached a post stock split record high of $122.07 on July 20, 2015.  Some analysts were forecasting that Apple would be the first company to reach $1 trillion in valuation.  On August 24, 2015 Apple's stock price is just under $107, a 12% decline from the July 20 high. 

Some of this decline is caused by softness in the Chinese market, which is critical to Apple's growth.  But a significant portion of the decline occurred before the very recent troubles in China and the devaluation of the Chinese currency, the yuan.  Analysts are concerned that Apples' robust product innovation machine has hit a pothole. 

During Apple's second quarter earnings announcement, CEO Tim Cook disappointed analysts by not announcing any major new product initiatives.  Market observers were hoping that Apple would announce new initiatives in product categories such as TV and entertainment and navigation systems for cars.  Apple made no such announcements.  The stock price started a slow and steady decline as a result.

Multiple academic and practitioner studies have shown that stocks respond quickly and decisively to a firm's successes or failures with new products.  Think of the performance of RIM (Blackberry) stock over the past few years - horrible performance in new product development followed by even worse stock price performance.  That is what is happening to Apple currently.  Apple will certainly never be the disaster that RIM has become, but its stock performance is not going improve substantially until it reignites its new product creation engine.

Apple's situation is similar to that of many leading companies - they create shareholder value primarily through product innovation.  The now famous "FANG" companies (Facebook, Amazon, Netflix, and Google) are successful product innovators.  Microsoft, HP, and IBM are examples of the negative impact of poor innovation - none of the three companies has been a leader in new products over the past decade and their stock prices have suffered because of it. It is absolutely critical for companies to recognize the importance of innovating and developing new products in order to sustain success. 

----------------------------------------------------------------------------------------------------------------------------------------

Read about RIT's Online Executive MBA Program curriculuum which includes courses in Managing Technology, Innovation and Research and Managing New Product Commercialization.

Topics: innovation, strategy