Without Apple, AirPods Would Just Be Another Loser

This month, a somewhat serious meme has been going around on Twitter and elsewhere purporting that Apple’s AirPods, if spun off as a separate company, would be valued at $175 billion. That’s the lofty level of real companies like Oracle and Adobe and Cisco Systems.

The boast isn’t entirely crazy. It’s quite possible that Apple’s wearables unit will bring in $20 billion in sales next year and have a gross profit margin around 35%.

But to get to the $175 billion valuation, you have to assume that investors would value a gadget maker at 17 times its sales or 25 times its profit. Not only would that be far more than Apple itself, which trades for about 4 times its sales or 22 times its profit, but it also ignores the market’s harsh view of a whole host of similar struggling companies. As we’ve said more than a few times around here, hardware is hard.

A long securities filing made public by Fitbit brought the true rejoinder to the AirPods silliness. The proxy form details Google’s $2 billion bid for the company and urges shareholders to vote in favor of the deal. It’s mostly pretty dull reading, but then you get to an eye-opening chart. Fitbit’s investment bankers drew up a list of comparable companies, like GoPro and its action cameras or Sonos with smart speakers, to help decide how much Fitbit might be worth. With only a few exceptions, these companies were trading at a bottom-of-the-barrel valuation of 1 times their sales or less.

Investors don’t dislike independent hardware companies—they hate them. Apple and Garmin are a rare exception. Software and service providers trade at much higher levels: Microsoft sells for almost 8 times its sales, Google for 4 times, and even unloved Uber for almost 3 times. Tragically, many hardware companies were valued for much more when they first went public. Fitbit’s stock price dropped 80% from its IPO before Google swooped in. By then, it was trading for a meager 0.4 times its revenue.

Maintaining an independent consumer hardware business is a losing battle in which companies get squeezed between cheap imitators and much larger rivals with more control. If AirPods went out on their own, they’d probably suffer the same fate.

Aaron Pressman

Twitter: @ampressman

Email: aaron.pressman@fortune.com

NEWSWORTHY

David and Goliath. Ad tech company Inform sued Google this week, alleging that the search giant has monopolized the online advertising market and illegally driven out competitors. Google, which is facing similar investigations from regulators around the world, declined to comment.

Home is where the heart is. Apple CEO Tim Cook faced some criticism for standing by while President Trump lied about a factory that makes Apple goods. But within the company, Cook's moves are drawing support. A survey conducted on Fortune's behalf on the anonymous workplace social network Blind found that 81.6% of Apple employees support Cook's efforts to engage the president on matters that "shape policy in Apple's favor."

Clearing the underbrush. Have an old Twitter account you're not using? Use it or lose it. Twitter says it will start deleting accounts that have not been logged into for six months or longer.

Nothing more than feelings. Amazon's Alexa digital assistant is about to get a bit peppier, and a bit sadder. The company said on Tuesday that it has created the capability for developers to make Alexa respond with a more emotional speaking style. Here, for example, is Alexa at its most disappointed. That might be the appropriate tone in which to deliver the news, according to newly leaked documents, that a major Amazon warehouse in New York has a higher injury rate than the average sawmill or steel foundry.

FOOD FOR THOUGHT

Speaking of Fitbit and its brethren, why do some of the most original new products come from startups in the first place? A review of research by three business school professors finds that, paradoxically, having fewer resources can help stir creativity and foster innovation. As Oguz Acar, Murat Tarakci, and Daan van Knippenberg explain in the Harvard Business Review, companies must balance constraints and freedom to generate the most innovative solutions:

According to the studies we reviewed, when there are no constraints on the creative process, complacency sets in, and people follow what psychologists call the path-of-least-resistance – they go for the most intuitive idea that comes to mind rather than investing in the development of better ideas. Constraints, in contrast, provide focus and a creative challenge that motivates people to search for and connect information from different sources to generate novel ideas for new products, services, or business processes.

IN CASE YOU MISSED IT

What Makes People Love Waze More Than Google Maps and Apple Maps? Its Army of Unpaid Human Editors By Alyssa Newcomb

‘Catastrophically Huge’: New Labor Laws Aimed at Independent Contractors Could Be a Huge Drag on Uber and Lyft Stock By Erik Sherman

HP Has a Good Quarter, While Xerox Plans to Go Hostile By Jonathan Vanian

Facebook Has Run an Ad Falsely Claiming Sean Hannity Is Trump’s New Running Mate for Almost a Week By Alyssa Newcomb

Best Buy Stock Hits All-Time High on Strong Pre-Holiday Season Results By Phil Wahba

The Death of the Tech Unicorn Has Been Greatly Exaggerated, According to Goldman’s Top Tech Banker By Rey Mashayekhi

These Tech Companies Spend the Most on Lobbying By Nicolas Rapp and Brian O'Keefe

BEFORE YOU GO

It's that time of year when Hollywood gives us the good stuff: all the Oscar-contending movies. The new version of Little Women directed by Greta Gerwig is getting great reviews. But as you sit around the Thanksgiving table tomorrow, don't follow the cues of actress Saoirse Ronan, who plays Jo in the movie. To get co-star Florence Pugh into the right frame of mind for family fight scenes, Ronan slapped her in the face. I recommend just passing the mashed potatoes.

Have a great Thanksgiving. We'll be back in your inbox on Monday.

Aaron Pressman

On Twitter: @ampressman

Email: aaron.pressman@fortune.com

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