Saturday, December 28, 2013

The insanity of Apple (AAPL) investors

The Apple (AAPL) board of directors has released their opinions on shareholder initiatives and has advised to vote against Carl Icahn's proposal to increase the share repurchase plan. This has stirred up some heated debate as to what AAPL should do with their $140 billion they have sitting around. AAPL's main problem as a company is they make profit faster then they know what to do with it. Literally don't know what to do with it because Steve Jobs called Warren Buffett for advice. Not surprisingly, Warren told him to run the company well and then buy back shares if the company is undervalued.
Steve Jobs didn't do that and Tim Cook has been hesitant but finally starting.

Lets go over some of the counter arguments that I keep hearing...

AAPL needs the money to be competitive
Did AAPL need $140 billion to come up with the iPod that started their growth? AAPL needs to have money for R&D no doubt. But lets be honest, if all they are going to do is release an iPhone 6 next year do they really need that much money? Tim Cook recently said they have great products planned in 2014. We'll get a new iPad and a new iPhone with different sized screens. When they start innovating again then we might make the case for them needing money.

They need the money for mergers and acquisitions
Absolutely they do and they should set some aside for that. However they have enough cash to buy half of Microsoft (MSFT) or half of Google (GOOG). What exactly are they needing this much cash for? There is a concern here that if they have too much money they might make sloppy M&As vs having a smaller cash horde and having to really be sure its a good company they want to buy out.

You are just being greedy its not your money its AAPL's
This one really riles me up. It is my money because I am the freaking owner! Tim Cook and the board of directors work for me! I think a lot of investors fail to fully understand what it means to own stock. ALL of it is your money. Some needs to be set aside for taking care of employees who work for you. Some needs to be set aside to grow your business. Why exactly did AAPL go into business for if it isn't going to enjoy the bounty of its profits?

Speaking of business lets look at AAPL's situation on a personal level to illustrate how whacked out this is.
Over the past twelve months (not calendar year) AAPL did $170 billion in revenue. For years they had zero debt. They added some last year because its a share buyback trick, a very nice one at that, but that's a topic for another time. They essentially have no debt. Their cash from operations was $53 billion (31% of revenue).
Now lets say you are surfing the net and come across a blogger who is working on his or her business... their portfolio.
They have a day job to cover bills and to fund their portfolio and they make $40,000 a year.
They have paid off their debt. No car payment, no credit cards, not even a mortgage! (AAPL has much more assets then liabilities and they just built a brand new corporate HQ).
They have 30% of their revenue available to work with, $12,000 a year.
They then tell you they have $35,000 in cash that they don't want to invest with because its a rainy day fund.
What would you tell this person?
Going back to AAPL, I think they need to announce they are applying their entire $140 billion to share repurchases.

First off we already have a real world example as to what would happen... Seagate (STX). They announced in Q2 2012 that they would buyback shares going from 425 million shares down to 250 by end of 2014. That is 40% of the company. They were so undervalued that hardly anything else would have given them the same growth. Take a look at what their stock price did since that announcement. +120% vs S&P rising only +35%. Now not all of that came from the buyback but a company that can cash flow buying that much has a lot going for it.

Second off how did AAPL do in 2013? They have incredible financials and are rolling in cash their stock must have just shot up in price right? Nope, +5% when S&P did +29%. I think nobody wants to touch a company that makes tons of profit and doesn't do anything with it. There isn't much point. Essentially AAPL's 2013 return came in August when Carl Icahn started putting pressure for a bigger buyback. Its like the market screamed "FINALLY!"

To be fair, AAPL has announce a $60 billion plan which is probably the biggest in history. That's why I bought them. It should give some upward pressure. However I feel they could be doing a lot more and I hope they are easing into this and in the end will give the owners what is theirs.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.


  1. All that money certainly gives them lots of options. Frankly, I'm concerned about Apple's ability to innovate. You see Amazon and Google rolling out successful initiatives....and all Apple does is re-release an upgraded product. It may be 15 years from now, but their amazing cash machine will run out if they never innovate. Innovate or shrivel and die.

    1. Well said Bryan and I agree. Android phones start off low quality but they have stepped up and can compete well vs the iPhone. Amazon is working on robots air delivering packages same day you order them. Google is making self driving cars and virtual reality glasses. Apple? *cricket chirp*.
      2014 will be make or break with me for AAPL. Either they get innovating and do a bigger share repurchase or I will need to move the money to somewhere else.

  2. I agree that Apple's challenge will be continuing to innovate. New technologies become commoditized rather quickly (and the pace seems to be increasing) so new innovation is a must. That said, I feel Apple's lack of innovation recently has been significantly overblown. Who else has released new groundbreaking products in tech? Google? They are working on lots of really cool projects, which i really admire, but what have they actually released? Google Glass is the only major innovative release I can think of and it has not taken off so far (I do think they are on the right track). Amazon? Great company but not a big tech innovator so far (kindle is an iPad knockoff competing largely on price). Samsung? iPhone imitator that launched a flop of a smart watch. I don't mean to downplay the competition or the risk of a failure to innovate but Apple wasn't first to do an mp3 player, smartphone or tablet but they came in and revolutionized each category. They set the bar so high with each product that everyone expects groundbreaking new devices in new categories every year or two. The same is not expected of any of Apple's competitors. No company has proven it can launch groundbreaking new technology every year or two. So far, Apple hasn't needed to. It can wait (for now) to get the next product category right rather than be first. Oh, and while they wait, they make boatloads of money every day. They need to innovate in their business but they still have plenty of time before they 'need' another new hit. Disclosure: prev owned AAPL but currently have no position but I am bullish on the company. Thanks for the article. My biggest concern as a shareholder was the growing cash pile and lack of a transparent plan on what to do with it.