Apple’s brains are starting to drain away

Money matters. No matter how much Silicon Valley types talk about the joys of working for an innovative company, at the end of the day it’s really about money. That’s why startups and mature companies alike offer stock options as a perk to lure the best and brightest. It shouldn’t be a huge surprise, then, to learn that the collapse of Apple’s stock price is beginning to hurt morale at the company.

Although it’s probably more a trickle than a flood, it appears that rank-and-file engineers and developers are leaving Apple as their retirement accounts melt like snow in the drought-stricken Sahara, says Trip Chowdhry, principal analyst of Global Equities Research. “Recruiters are seeing more and more employees from Apple applying for jobs at Google, LinkedIn, Facebook, and even HP,” he says.

[ Apple’s perceived innovation has also taken a hit — Galen Gruman tells why it’s not necessarily true. | Stay ahead of the key tech business news with InfoWorld’s Today’s Headlines: First Look newsletter. ]

Apple is hardly suffering a near-death experience, and anyone who says so isn’t worth listening to. The company makes a lot of money, sits on a huge pile of cash, and sells millions of products every month. But it is suffering a crisis of perception. And like money, perceptions matter.

Consider the very cool reception for iOS 7. Admittedly it’s still in beta, but the outlines of the new mobile OS are clear, and it’s not going to be a smash hit. (My colleague Galen Gruman agrees, seeing it not as a “oh my God” upgrade but as a smart evolution of Apple’s underlying services business, part of a long-term direction from a tech company that still thinks in the long term.) Even if it’s better than the digerati give it credit for, there is a perception that Apple has lost its innovative edge and iOS 7 is a symptom of creative fatigue.

Apple is a victim of its own success In a sense, Apple is a victim of its own success and the wildly optimistic expectations of fanboys and investment bankers alike. The company created great products that quite literally changed the world and for years seemed to have a lock on the mobile market. As a result, Wall Street, which so often lacks a sense of proportion, vastly overvalued the company.

Just 10 months ago, Apple’s stock was trading at $700 a share, a frothy valuation that could probably never be supported by a realistic sense of the company’s earnings potential. As of this week, shares are worth about $420, a plunge of 40 percent. I believe that the current price is too low and is yet another example of Wall Street’s naive herd mentality.

But it doesn’t matter. If an Apple engineer owns 5,000 shares, his or her once-$3.5 million nest egg is now worth $2.1 million. Sure, that’s still a lot of money, but people freak when their retirement accounts shrink, and it explains the drift toward the exits that Chowdhry has seen.

Although Chowdry is relatively small potatoes on Wall Street, I value his opinion because he understands technology and goes to the trouble to attend numerous industry events every year. While he’s there, he makes a point of talking to engineers and developers who do the work inside a technology company. He doesn’t just talk numbers with the CFOs.

Six or seven months ago, Chowdhry told me he didn’t see much movement of employees out of Apple. But since then, while attending conferences on cloud and mobile development, he’s come across several dozen employees who have left or are looking hard. Recruiters at those conferences told him they are hearing from engineers who are even interested in moving to Hewlett-Packard, a company that not too long ago was beginning to look like a zombie. Why go there? In a word, perceptions. Right or wrong, there is a perception that HP is moving forward. And of course, working at Google and Facebook has always been attractive.

Samsung is losing its swagger, too Apple is not the only company being hit by exaggerated perceptions. Samsung, Apple’s major rival, had been an industry and Wall Street darling. But that started to change when the Galaxy S 4 shipped. It got fairly tepid reviews, and perceptions of Samsung’s place in the technology universe began to shift.

The merits of the Galaxy S 4 aside, it’s actually selling quite well. It sold 10 million units in the first 27 days after its introduction in April 2013. For reference, it took its predecessor, the Galaxy S III, 50 days to reach the same benchmark.

Meanwhile, both Samsung and BlackBerry recently reported earnings figures that disappointed Wall Street. It’s becoming apparent that the market for high-end smartphones is close to saturation, at least in the United States and Europe. There’s still strong demand in less developed parts of the world, but buyers there will likely opt for lower-priced models, a shift that will further depress earnings and profit margins for companies like Apple and Samsung.

Chowdhry argues that Apple needs a change in top management — and needs it now. I’m not ready to say that. But the process of bringing expectations in line with reality is a difficult one, and it will take some time.

I welcome your comments, tips, and suggestions. Post them here (Add a comment) so that all our readers can share them, or reach me at bill@billsnyder.biz. Follow me on Twitter at BSnyderSF.

This article, “Apple’s brains are starting to drain away,” was originally published by InfoWorld.com. Read more of Bill Snyder’s Tech’s Bottom Line blog and follow the latest technology business developments at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.