People, no less than renowned hedgie David Einhorn, have been complaining that Apple Inc. (NASDAQ:AAPL) is an underperforming stock, and needs to unlock value, which leaves me scratching my head thinking, “underperforming? What world are we living in?” Do we only look through a four month window?
Then I read a column I appreciated written by Maxwell Fisher of the Motley Fool “Are Apple’s Glory Days Finally Over?” Of course, you can appreciate something, and not necessarily mean I fully agree with it.
Einhorn stated, “People who have gone through traumas believe you can never have enough cash, and Apple Inc. (NASDAQ:AAPL) has been through several traumas.” What he’s referring to is Apple’s 137 billion in cash it has stockpiled in warehouses around the world, which, even electronically, to house that much cash would take several warehouses. The traumas refer to Apple Inc. (NASDAQ:AAPL) nearly going out of business; Einhorn went on to compare Apple’s management to his depression era Grandma who used to hang-up before his message machine would pick- up to avoid spending the few cents.
He proposes that Apple Inc. (NASDAQ:AAPL) should start giving back cash back to shareholders by issuing preferred stock to shareholders which would pay out at a 4% rate.
Similarly, one commenter (EquityBull) congratulating Mr. Fisher on the insight of his column stated that if takes a lawsuit to get Apple to give some cash back to shareholders then that defines it as non-shareholder friendly, and as Mr. Warren Buffett advises being only in “shareholder” friendly companies, he decided to sell.
Are They Right?
Tough to say. Let’s be clear, Apple Inc. (NASDAQ:AAPL) did recently institute a dividend of $10.60 a year, a 2%+ yield based on current prices. While they create more free cash flow each quarter than they payout, I don’t necessarily see this as a sign of being unfriendly.
Let’s be clear, Apple could afford to pay more. That mountain of cash is just sitting there, earning next to zero, there is little doubt in anyone’s mind they could pay out more of it, or start buying back shares which I think is the most likely scenario, especially with the current prices Apple trades for it might not be a bad investment. Also, based on current tax laws, to repatriate that money would be advantageous tax wise.
Onto The Competition
In his column, Mr. Fisher complains about Apple’s recent lack of innovation, and rightfully states that Apple’s high margins have attracted competition like honey does a bear. He predicts without new innovation margins will be hammered, as Samsung and others gives away lower priced phones and tablets.
First of all, in general I agree, but this assumes that Apple is just going to stand there with what it considers a pat hand.
I offer the following counterpoints.
1). Apple will likely be introducing cheaper versions of the iPhone, saving money on the body of the phone (screen size and materials) to help grab some of this market.
2). Innovation in hardware does take time. The iPad and iPhone were three years in development. During the conference call CEO Tim Cook did state that his super tight lipped company had some amazing things in development. Are we just all going to gloss over this statement because the wind appears to be blowing in a different direction? Does it really disperse such sounds so readily? Would a CEO of the world’s most successful company go on record with such a statement in an attempt to sandbag investors? It’s a fair question that I’m asking.
3). Innovation does take other forms while we wait for the next WOW product we still see innovation under the hood, from better screens to battery life. Also, if one comes, given the three year development time, it very well could be a Steve Jobs brainchild. ### Counterpoint- My son’s friend Peter, wonders whether without Job’s perfectionism and artistry whether the product will have the same mesmerizing effect on consumers.
Amazon.com, Inc. (NASDAQ:AMZN)
In the column, Fisher states that Amazon will be getting into the smart phone biz, just as it did with tablets. This might be the case, but to do so the company has two choices-
1). Develop its own operating system
2). Use a forked version of Google Inc (NASDAQ:GOOG)’s Android
Developing its own OS takes major resources, in a game that it is way behind in, if it is to do so, it will likely fork Android. The question is, how does Amazon benefit from this venture?
Do people consume content on phones? I have both tried to read books on my phone and watch movies. Even on my big screen Samsung it’s just too small and difficult, and the smaller battery gets eaten fairly rapidly. Amazon developed the Kindle Fire tablet precisely to give people a way to consume Amazon products and get them into their own ecosystem.
I consume content using my auditory modality on my phone- podcasts, music, etc. While Amazon might be able to sell a few more mp3 downloads, I would like to understand where the profit would be for the company before I give into the idea that they will enter the smart phone market. They sell the Kindle Fire at cost because they believe they will profit by selling content and products to their tablet users. Will they profit to the same extent off of smartphones to justify the large cost of development? How will they, in an ultra-crowded market, convince people to adopt their offering?
Bottom Line
While the concerns raised for Mr. Fisher are valid, it is my analysis that this gloomy outlook assumes that Apple is, and will be, resting on its laurels. With the tremendous pile of cash they have (over 25% of valuation) and the low multiple, a lot of bad news is baked into the current stock price. I believe Apple is a good bet at these valuations, and I said just the opposite at $700 a share.
The article Apple Underperforming and Down for the Count? originally appeared on Fool.com and is written by Margie Nemcick-Cruz.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
