Can Apple Get Its Groove Back?

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The Flash Crash breeds uncertainty.It was a spooky Halloween for Apple (NASDAQ:AAPL) as shares plunged well below $600 in reaction to news Monday that chief mobile software architect Scott Forstall, a 15-year veteran of the company and the late Steve Jobs’s confident, had been ousted. Retail chief John Browett was also let go after only six months on the job, but it was Forstall’s dismissal that most exacerbated concerns about CEO Tim Cook’s leadership abilities.

Cook gave most of Forstall’s responsibilities to Macintosh software chief Craig Federighi, while parts of his job went to Internet chief Eddy Cue and designer Jony Ive. The news came on a day markets were closed due to superstorm Sandy, but when they re-opened on Wednesday, the shock of the shake-up had not yet worn off, and shares were driven to a three-month low.

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Apple shares ultimately closed the day down 1.4 percent to $595.32, but fell as low as $588 in morning trading — a spooky Halloween for shareholders followed by Friday’s flat action. In October, Apple shares shed a tenth of their value, dropping from an all-time high of $705 reached in September.

The management upheaval is just the latest in a series of negative surprises that have investors pulling back. Apple fell short of third-quarter earnings targets last week, after having fallen short in the previous quarter as well. The company’s new Maps software has been met with widespread ridicule over glaring mistakes and informational gaps. Sources told Reuters that Forstall and Cook had disagreed over the need to publicly apologize for the maps embarrassment.

Ultimately, Cook decided to issue a public apology, and not long after, Forstall was out.

Apple also recently entered the small-tablet market with its iPad mini, which is being met with more concern than enthusiasm. The mini is a bit late to the game, despite Apple having pioneered the modern tablet market with the first iPad in 2010. Amazon (NASDAQ:AMZN) and Barnes & Noble (NYSE:BKS) both introduced their own mini tablet offerings a year ago.

Justifiably, investors are concerned about demand for the new device. Its price tag is higher than that of competitors in the space, which means it will rely more heavily on consumers drawn to its size rather than those looking for more affordable tablets. Investors are also concerned about the device’s profitability, especially because the lower-priced mini threatens to cannibalize some sales of the original iPad.

“The sudden departure of Scott Forstall doesn’t help,” said Shaw Wu, an analyst with Sterne Agee. “Now there’s some uncertainty in the management.”

“With a large base of approximately 60,400 full-time employees, it would be easy to conclude that the departures are not important,” said Keith Bachman, analyst with BMO Capital Markets. “However, we do believe the departures are a negative, since we think Mr. Forstall in particular added value to Apple.”

As vice president of iOS software, Forstall deserves a lot of the credit for the success of Apple’s mobile devices. But he has also been criticized by some for his style and direction on the software. Some of those critics were reportedly Apple employees. Forstall often clashed with other executives, according to some accounts. He also had, on more than one occasion, promised more than he could deliver on features.

Now Federighi, Ive, and Cue will together develop the look, feel, and engineering of the all-important software that runs iPhones and iPads.

Cue will be tasked with improving Maps and voice-enabled digital assistant Siri. And given his track record on fixing services and products that initially fall short, he seems the best man for the job. Cue was behind the revamping of the short-lived MobileMe storage service into the well-received iCloud offering. His years of dealing with entertainment companies for iTunes demonstrate his ability to work well with partners, which will come in handy while fixing Maps, given that he will have to work closely with TomTom and business listings provider Yelp (NYSE:YELP).

Cue and Cook will work more closely with Federighi, who helped bring popular mobile features such as notifications and Facebook (NASDAQ:FB) integration to the latest Mac operating system, Mountain Lion. Federighi has been credited with being a visionary in software engineering.

Ive, who has worked on such iconic products as the multi-hued iMac computers, the iPod, iPhone, and iPad, will be freed of constraints placed on him by Forstall, whose design philosophy was not shared by Ive. Forstall’s exit will likely allow Ive more freedom, which could mean a slightly different design direction on Apple software going forward.

For all those reasons and more, the management shake-up at Apple may not be the ominous sign indicated by the market’s reaction on Wednesday. But investors have taken a wait-and-see approach to the stock after numerous disappointments of late. Apple’s stock is unlikely to witness the sort of full-on feeding frenzy that typified the earlier half of the year until it fixes Maps and proves that the iPad mini is a positive for earnings and that its new management team can cut it. If Apple weathers this storm, though, there’s no telling how high shares will soar.

On Thursday, shares of Apple (NASDAQ:AAPL) could not ignite past $600 for too long and finished the day at $596.54 per share.

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