Beware This Tech Giant's 'Brain Drain'

Apple (AAPL) was one of the hottest tech companies to work for in the mid-2000s...

Back then, it was run by some of the most legendary names in the tech world – the leaders and innovators behind today's most important technology.

At the tech giant's helm, for instance, was founder Steve Jobs. And Jobs was a true visionary. He was one of the world's most renowned businessmen and inventors. He pioneered the personal computer and created iconic devices like the iPod and the iPhone. But he didn't do it alone...

He had help from design genius Jony Ive. Ive joined the Apple team in 1992. He served as Apple's senior vice president of industrial design and later as its chief design officer. He helped create the iPod, iPhone, MacBook, Apple Watch – you name it. He even designed some of Apple's very own retail stores and its operating systems.

In 2019, though, Ive left to start his own design firm, LoveFrom. He stayed on for a few years as a consultant for Apple, before the partnership officially came to an end in 2022.

That alone wasn't a detrimental hit to the tech giant. However, Ive's departure follows the departure of several other Apple visionaries. And according to recent news, this exodus is only getting worse...

Today, we'll take a look at the Apple "brain drain" and discuss why it's a worrisome sign for investors.

Apple is losing top talent hand over fist...

Last month, Bart Andre, one of the company's last remaining industrial designers from the early '90s, announced he was also leaving. He joins three other senior product designers who all left late last year.

And it's not just the industrial design team... Several senior software designers have warned they'll be leaving soon as well.

This is a troubling sign not only for the company – but also for investors.

According to a 2017 report from consulting giant McKinsey, finding – and keeping – good talent is extremely important to a business's success. In a study of more than 600,000 researchers, entertainers, politicians, and athletes, McKinsey found that "high performers" are five times more productive than average performers.

Studies of businesses show that the gap is even more pronounced, especially when the jobs are more complex. For instance, in "highly complex" roles – like software development – high performers are nine times more productive.

In other words, when looking at Big Tech companies like Apple, investors need to pay attention to where good talent is heading and where it's leaving... as it could be a sign of what's ahead.

Without visionaries like Ive and Jobs, who passed away in 2011, it seems Apple's top employees aren't as motivated to stick around. Nearly all of the senior designers who worked under Ive have left to work for LoveFrom.

On top of that, when Ive left in 2019, Apple put Chief Operating Officer Jeff Williams in charge of both design teams. That has reportedly frustrated a lot of Apple's creatives... further spurring this brain drain.

And if Apple can't keep churning out great product designs, investors will have a hard time paying a huge premium for shares like they do today...

And yet, the market doesn't seem to realize this...

We can see this through our Embedded Expectations Analysis ("EEA") framework.

The EEA starts by looking at a company's current stock price. From there, we can calculate what the market expects from future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

Apple's Uniform return on assets ("ROA") has been at least 40% for the past five years, climbing to as high as 57% in 2021. That's more than four times the corporate average of 12%.

As you can see, investors expect that incredible performance to continue. At current prices, Apple's Uniform ROA is forecast to be around 50% through 2028...

Apple has been such a strong business because it has exceptional talent. If that talent moves elsewhere, the company will no doubt struggle to keep its returns as high as they've been.

That said, Apple might not feel the effect of these problems right away... After all, the company does have strong competitive advantages when it comes to brand recognition and switching costs. But if it doesn't do anything to fix its brain drain, it won't be able to rely on that forever.

Apple may be coasting on its last few years of successful design. And unless it's able to address the frustrations that are driving its top talent away, investors are going to get burned in the coming years.

Regards,

Rob Spivey
March 13, 2024