Apple Inc. (AAPL): The Next Microsoft Corporation (MSFT)?

Apple Inc. (NASDAQ:AAPL) has underperformed the market in dramatic fashion over the past year. The company’s shares are down 26.6% in the past twelve month,s while the NASDAQ Composite is up 8.5%; even Microsoft Corporation (NASDAQ:MSFT) is up 3.5%. The Street has built in expectations of lower growth in Apple’s earnings, and investors demanded returning some of its $142 billion cash balance to shareholders. This is strikingly similar to what happened at Microsoft Corporation (NASDAQ:MSFT) in the early 2000s.

Apple Taking Actions to not be the Next Microsoft

Apple Inc. (NASDAQ:AAPL) seems to have learned at least one thing from Microsoft: start returning cash sooner than later. It announced a plan to return $100 billion to shareholders last week. Microsoft Corporation (NASDAQ:MSFT), on the other hand, waited over three years from its peak market cap to start reducing its cash balance by returning it to shareholders. Microsoft was under the impression it was still a high growth company in 2003, despite earnings actually declining in 2000, no growth in 2001, and moderate growth in 2003. While the economy was a factor, it still missed the signs it was becoming a mature company.

Apple Inc. (NASDAQ:AAPL) does not have the significant product launches to drive high earnings growth. The iPad and iPhone became standards in product categories that Apple essentially created, and it has penetrated new markets with these offerings, which extended its period of high growth, but that is beginning to wane. There is no new category or product known or expected in the Apple portfolio, so lower growth and potential margin erosion is expected. However, Apple Inc. (NASDAQ:AAPL) can still grow and, most importantly, generate cash. If it essentially transforms its view from the Street into an income/growth stock versus just growth, it can find new investors and support or even drive its share price higher.

While hanging onto some cash as dry powder for investment or to deal with economic downturns is a good thing, holding onto too much of it is viewed unfavorably by investors. Investors do not like companies to keep significant cash surpluses. In strictly financial terms, the $142 billion on the books at Apple Inc. (NASDAQ:AAPL) is actually worth less than $142 billion to an investor. The money is not working to generate a return for non-controlling stockholders when it is truly excess cash. Since a shareholder cannot use this cash for anything, mainly to generate an investment return, the cash actually should be discounted at the equity risk premium to a date when it will start generating a return for the shareholder or the company. Apple Inc. (NASDAQ:AAPL) has announced it plans to return $100 billion to shareholders by 2015. Depending on FCF generation through 2015, this number should probably push even higher.