“In the last quarter of last year, especially with the change in tax rate coming, I think Investors got exasperated. There were a number of investors that this was their largest holding, And it destroyed their record for last year. There were ramifications for what the board did.”

-Lawrence Haverty, Gamco Investors on Apple’s $137 billion dollar cash hoard

 

That absurd quote above was heard this morning on Bloomberg with Tom Keene interviewing Haverty. The display of investing acumen cognitive dissonance is rather ironic.

As a longstanding Apple guy (think Mac Classic in 1989) and someone who was pushing the stock post iPod at $15 (pre-split), I cannot help but be astounded at the current crop of Apple shareholders. Wall Street has always misunderstood Apple but its now getting ridiculous.

Recall that during the run up from a near bankruptcy to the largest company on earth, creatively destroying all competitors in its path, the value guys all touted the cash as a reason the company was cheap. Ex-Cash, its a 9 P/E we heard.

Now, they insist the cash must be returned to its rightful owners — them.

If you want to know why Apple is holding onto all that money (aside from obvious tax considerations), just look at Dell. It is a cautionary tale than any technology company can miss the next shifting tech trend and quickly become irrelevant. Bang, you are the next Maytag. Even Microsoft’s history offers a foreboding look at using special dividends as a salve to investors concerned only with their quarterly P&L (and personal compensation via 2 & 20 fee structures).

David Einhorn is a great investor (and a nice guy), but he joined the Apple party somewhat late, and suffered a setback last year with the rest of shareholders once the law of big numbers set in. He is now suing the company because they have too much cash.

My takeaway is that Graham & Dodd value investors are terrible at buying technology companies (They don’t know how to manage positions)

Now we have guys like Lawrence Haverty the Gamco portfolio manager, who is the source of the quote above. Boo hoo for the investors who feasted on the way up, but — WTF?!? – saw a performance setback because after a 10,000% move, Apple now gave back 30%?

The cognitive dissonance comes from not admitting their error — hanging around too long — and instead blaming the board.

My criticism of the critics is not Monday morning quarterbacking — recall that we took some Apple off the table last year ($625-650) and advised clients to do the same. And we further took that warning public back in October and November of 2012. Those who overstayed their welcomes have only themselves to blame. (Aren’t hedge funds supposed to be, well, “hedged?”)

What should Apple do? For legal reasons, they should hear what these activist shareholder are suggesting, giving them a thorough hearing out, with all attendant chin stroking and “Hmmm, interesting” — prior to ignoring them.

Apple has a long-term strategic plan which for obvious competitive reasons is top secret. Sorry, activist investors, but we cannot share them with you because it would give an advantage to competitors like Samsung and Google and Amazon and Facebook. But rest assured, we have a plan.

However, Apple can tell investors that their strategies may or may not include the following:

-Funding a separate R&D division (like Xerox Parc) to keep fostering “outside the box” innovations;

-Creating a subscription based unlimited streaming music business;

-Make a series of strategic acquisitions (such as Pandora or Twitter);

-Funding a long term Venture Capital division to foster more innovations for the Apple ecosystem

-Supersecret plan X! Its so secret, it would risk of billions of dollars in business, so excuse us if we cannot tell you.

Etc.

Technology is a fast moving sector of the economy, where trends shift quickly and alliances change overnight. Having a cash hoard gives Apple maximum flexibility to deal with this for their future.

Sorry if after 30 years, changing the dynamic in no less than 6 industries, creating the biggest technology firm in the world and briefly, the biggest company of any sort on the planet, we had a bad couple of quarters. That was inevitable.

It was obvious that Apple had to eventually run into the law of large numbers. Perhaps less obvious was the law of activist fund managers:  No matter how much money a company makes for investors, they all eventually want more . . .

 

 

Previously:

Popular or Best? (ATPM January 1998)

Analysts Still Underestimate Apple (Real Money, Jan 13, 2005)

Is Disney/Pixar the sequel to Apple/NeXT ? (January 30th, 2004)

Apple morphs into a Consumer Electronics Co (April 25th, 2004)

Apple to Music Industry: Monetize Your IP (April 28th, 2004)

Apple Now a Major Music Retailer (RealMoney.com 12/08/05)

Apple Now More Valuable Than Microsoft (May 26th, 2010)

A Few Thoughts on Steve Jobs/Apple (January 18th, 2011)

And then there were none: Apple’s destruction of rivals (Washington Post, September 4, 2011)

Why Apple should use its cash hoard to buy Twitter (Washington Post,  March 23, 2012)

Category: Analysts, Really, really bad calls, Technology, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

49 Responses to “The Collossal Gall of Bad Apple Investors”

  1. VennData says:

    Facebook is malware, people suddenly realize

    http://blogs.computerworld.com/cloud-computing/21755/facebook-malware-people-suddenly-realise-itbwcw

    A lot of “suddenly realize” going around. Oh well.

  2. Orange14 says:

    “My takeaway is that Graham & Dodd value investors are terrible at buying technology companies” LOL, Ben Graham famously commented that he never owned IBM in his life as he did not think that it fit in with his analysis for value. APPL is an interesting case study and I’ve long felt that they are simply a very good industrial design company that was led by a charismatic CEO who had his own idea about product development. He was able to see how existing technology could be used to create value added products (not an easy task). In the long run one is still faced with the “invent or die” aphorism and it remains to be seen whether APPL can succeed. As a Graham/Dodd investor, I’ve never felt comfortable owning any APPL stock directly (though my S&P fund obviously does).

    I’m not sanguine on their international prospects, particularly in the developing world where price point is more critical than design. I also think that using cash to just buy stuff is fraught with danger (MSFT and HP being excellent examples here). The only APPL product that I’ve owned is an I-Pod which is nearing its last days and it’s replacement will be a vanilla MP3 player.

  3. -Funding a separate R&D division (like Xerox Parc) to keep fostering “outside the box” innovations;

    -Funding a long term Venture Capital division to foster more innovations for the Apple ecosystem
    ~~~
    speaking of..”…to foster more innovations for the Apple ecosystem…”

    AAPL could buy MTRN (Market Cap 568.98M) http://finviz.com/quote.ashx?t=MTRN
    http://materion.com/

    and use it for a ‘Real World’ R&D facility to Develop/Execute/Show ‘CleanTech’ in MFG (note, this is Not a veiled slam against MTRN’s, current, Practices)

    given, http://search.yippy.com/search?query=Asian+Brown+Cloud&tb=sitesearch-all&v%3Aproject=clusty

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus-ns-aaf&v%3Aproject=clusty&query=eWaste+recycling+nightmare

    there are, literally and figuratively, “Miles to go..”

    don’t forget, at the minimum.. http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus-ns-aaf&v%3Aproject=clusty&query=m2m+industrial+networking

    is involved..there Is ‘Tech’,in ‘CleanTech’, afterall..
    ~~~
    -Supersecret plan X! Its so secret, it would risk of billions of dollars in business, so excuse us if we cannot tell you.

    Tried, and True.

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus-ns-aaf&v%3Aproject=clusty&query=South+Seas+Bubble+A+plan+so+Secret
    ~~~

    btw, Nice Article, BR~

  4. greg says:

    Great article Barry, especially the second last paragraph. Perhaps Tim Cook should get a little Jobsian here and simply tell investors the following:

    Last time I looked it was our team who took Apple from a niche computer company to the biggest company on the planet, not the shareholders, or as you like to call yourselves, the owners, the naivete by the way is always a cause for chuckling in our board meetings.
    When you accumulate enough shares to where you actually believe you control the company, give us a call. We will then share our “poison pill” strategy, which we think you would find interesting.

    If you don’t like our strategy, sell your shares, or even take a large short position.

    I hope we have made our position clear.

    Thank you.

  5. genevakiwi says:

    So the owner of a company shouldn’t ask his employees to pay him out a dividend?
    And why the hell should it matter when he bought the company?

  6. AHodge says:

    well i generally favor investor/”owner” rights
    if they arent adding to bubbleblowing and much more debt
    einhorns idea looks like that
    this saddles Apple with a forever quasi fixed cash “interest” on the preferred
    you cant just turn that off like a dividend
    there is a reason why most tech companies dont carry much debt

    when i once tried to sell a next years foreign earnings currency hedge
    to an apple asst Treas. in Cupertino
    he said
    we dont only not know how much earnings will be
    we dont know what we will be selling!

    meanwhile the investors can capitalize it and sell it
    at a big multiple 25X ? of an annual interest payment
    works for him im sure
    preferred may allow interest payments from the offshore $ without paying corp tax
    but im guessing there may be other structured ways to pay interest or dividends from offshore
    w/o it becoming taxable

  7. jswede says:

    totally agree Barry.

    let’s see, the first time AAPL had a “cash hoard” they used it to create the iTunes platform…. the second time, they created the Apple Store…. roughly speaking, the stock is up 40x since then.

    I’ll guess Einhorn would argue that investors would have had a better IRR on that cash if paid as dividend. lol

  8. A says:

    The good news, is that with the media and the investment sheep totally focused on the Apple share price and the pending demise of Research in Motion, the rest of us could shop for the hundreds of under valued equities that were completely ignored.

    It would be smart if most of the sheep would acknowledge that there are other stocks that have doubled in value over a similar time frame to that of Apple – the difference is that the share prices were not triple-digit.

    If you want to be part of the herd and put most (too much) of your $$ in a popular stock, well, what goes up must come down. What a great lesson in rebalancing…at least for those who wish to learn.

  9. Dr. Goose says:

    There’s a question for Cook and his board
    Arising from Apple’s cash horde:
    At exactly what height
    Of liquidity might
    Alternatives best be explored?

    Said Einhorn: “I’m finding absurd
    All the dividend plans that I’ve heard.
    If shareholder value
    Is your rationale, you’ll
    Agree that my way is preferred.”

  10. td says:

    So you think Apple is hoarding cash because they may have to take themselves private someday? Interesting to think about….. I’ve never had a position of any consequence in Apple because I’ll confess I don’t get them, or at least I haven’t gotten them for the last couple of years but it seems to me that if you need to hoard cash to that degree for a “rainy day”then you are signaling that you’ve got a long term existential issue. I look to my kids for those kinds of trends and I can tell you that iPods and iTunes are fossils. In their minds its all Spotify, Pandora, Hulu etc….. and while its true those companies have major challenges they have broken the lock Apple has had on proprietary devices that deliver content sold by Apple. That’s over….In my humble opinion they need to buy something, something big, like maybe one of the aforementioned names because if they’re only digging in because look what happened to Dell then they should just make the transition to an income stock.

    ~~~

    BR: No. The Dell example is not about going private, but becoming irrlevant

  11. louis says:

    Can we get Hank Paulson to organize a bailout for these Hedge Funds?

  12. abbyjoseph says:

    The share price of Apple Inc. (NASDAQ/AAPL) has been on a steady decline since trading at $705.07 on September 21, 2012. There are questions swirling around regarding the ability of Apple CEO Timothy Cook to deliver the superlative revenue growth traders have been accustomed to in the past. But with the rise of Samsung Electronics Co. Ltd. and “Android”-based phones and tablets, the competitive environment has tightened; Apple will need a “Plan B,” according to my stock analysis.

    The declining revenue growth is an indication that Apple may be in trouble. According to analysts polled by Thomson Financial, Apple is estimated to grow its revenues by 22.2% in fiscal 2013 and fall to a mere 15.1% in fiscal 2014. My stock analysis shows that these are not growth metrics investors are paying for; rather, they pale in comparison to the 70.0% and 80.0% growth seen in 2011. The same goes for the chipmakers that need to shift their focus to the mobile market. (Read “Why Chipmakers Need to Focus on the Mobile Market.”)

    ~~~

    BR: by steady decline, you mean 5 months following 120 months of relentless growth?

  13. franklin411 says:

    Creative destruction? What did Apple ever create? MP3 Players? No…that was Creative Labs. Tablets? No…that was IBM. Touchscreen phones? No…that was Palm. Thin and light laptops? No…that was IBM again.

    The only thing Apple ever created was a crop of fools who fervently believe that Apple ever created anything.

    ~~~

    BR: Can anyone else explain to franklin why he is a clueless dolt? I have stuff to do.

  14. SkepticalOx says:

    @franklin411 Really? Anti-fanboyism in display right there. Apple may not have invented any of those things, but they created products that were leaps and bounds ahead of their competitors when it came out. From it’s features, qualities, to simplicity of use, none of those original products you named even came close to Apple. They created products and ecosystems to support their products that changed a whole lot of the industries.

  15. Robert M says:

    STOP MAKING SENSE!

  16. rd says:

    We are still in a period of very dynamic change in the technology sector, so having cash during a period when being slow to come up with a new product every 2 years is very valuable by itself – just ask companies like RIMM.

    AAPL is clearly not at the maturity level of an electric utility or pet food company where you expect them to spin out a constant stream of big dividends. We are still in the period when tech companies can become large and then vanish without leaving any dividends behind. Like the old question a bout a tree falling in the forest without anybody around, if a tech company grows huge and then goes bankrupt without ever paying any dividends, did it every really exist at all? Instead, AAPL is currently paying over a 2% dividend, in line with the overall stock market while maintaining a large cash buffer, and investing in R&D – it actually seems to be a fairly balanced approach to having a prosperous long-term future.

  17. techy says:

    Sorry Barry but I do not agree that a company needs 100 billion to be prepared for future downturn.

    The chances of another iPod or iPhone or iPad is very slim. they now have to compete on quality and cost to sell their products. But they can definitely go into the business of amzon, netflix, cable etc.. ie service provider since they have a huge ecosystem.

    But If I was the owner of apple, I would keep the cash only for tax reason and supplier bulk purchase advance money…other than that I would not keep it as a burn money in case business goes south.

    Do you think MSFT, CSCO etc should simply keep burning the money in the hope of staying eternally relevant.

    Do you think AAPL needs to do what MSFT or HPQ did with their cash? just waste it because its shareholders money.

    To create iPhone or iPad how much did apple invest, I think not more than 10 billion. so why do they need 100 billion now?

  18. jcallip says:

    It’s quotes like this that makes this my favorite site:

    “WTF?!? – saw a performance setback because after a 10,000% move, Apple now gave back 30%?”

    Keep up the good work. – jeff

  19. SkepticalOx says:

    @genevakiwi

    I think you’re generous when you call them “owners” (yes, I’m aware of the technical definition of a shareholder). They certainly don’t think like owners of a business. They’re traders, finance guys, etc. etc. (not saying there is anything wrong with being those things).

    For what it’s worth, Apple has been far more generous to their “owners” in terms of dividends now then they were when their company and stock were growing like gangbusters.

  20. SkepticalOx says:

    @abbyjoseph Law of Large Numbers. 22.2% revenue growth in FY’2013 vs. FY’2012 for Apple is:

    $35,000,000,000

    That’s more revenue than almost every single other corporation in existence. Heck, their growth in revenue this year alone will be larger than the GDP of a whole lot of countries.

  21. BennyProfane says:

    All this whining coming from a ………….. Met fan.

    Financial blood sucker.

  22. formerlawyer says:

    @BennyProfane Says:
    All this whining coming from a ………….. Met fan.

    Financial blood sucker.

    >That is a low blow. A low blow – but deserved. Well done.

  23. MikeW says:

    You’ve got me smiling with the Mac Classic ’89 reference.

    At the time I worked in IT for a mid-sized Wall Street firm and we had a single one of those. It struck all of us as mostly being a toy, so it was a little hard to justify it being in a work setting, and yet it also felt like looking into the future a bit – as turned out true.

    I suspect what younger people wouldn’t know about those early machines is that although there was a general understanding that they would develop into something more, there was not much practical use for them at the time.

    They had much cooler fonts than the dumb terminals of the time, had a few simple painting and word processor applications, and could play funny sound clips (Everyone’s favorite was Curly saying “I’m trying to think but nothing happens.”). But the intenet had yet to mushroom, and Macs looked like hobby gadgets.

  24. formerlawyer says:

    @MikeW Says:
    Longtime Mac user, I think the Mac took off once the Laserwriter Printer ($5,000.00!) came along, well that and the Appletalk Protocol network using telephone cables. When that happened – you could get decent fonts (Palatino anyone?) and see the future.

  25. Disinfectant says:

    Barry, I think you’re suffering from some cognitive dissonance yourself. Just a couple days ago, you acknowledged that Dell WASTED a huge amount of money and that it hurt investors. So why do you think Apple should risk its cash in the same manner. If Apple is forced to change direction with its business, success is not guaranteed in a new line of business. From an investor’s point of view, they want to get some of the cash out of the company and remove the risk that it will be wasted, while maintaining the upside of the business. From a management and BOD standpoint, of course, the priority is to continue getting paychecks.

    ~~~

    BR: YES, BUYING BACK INFLATED SHARES — THEY SPENT MORE ON BUYBACKS THAN THEY EVER EARNED

  26. MikeW says:

    Too funny, formerlawyer, “Appletalk”…I can recall having to string white phone cable all over another office where the man who had just put up new ceiling tile, a real old-world craftsman from Italy, got infuriated with me about moving them, but we had to hook those Macs together – they could share data, share messages, and as you point out, share printers, when that was all still novel. People sometimes badmouth AAPL for just being a design company, but they have a long track record of doing really innovative nuts-and-bolts tech work as well.

  27. constantnormal says:

    “-Make a series of strategic acquisitions (such as Pandora or Twitter);”

    BR, have you no imagination? How about some movie studios, or Disney?

  28. greg says:

    @ techY: Sorry Barry but I do not agree that a company needs 100 billion to be prepared for future downturn. The chances of another iPod or iPhone or iPad is very slim.

    @ techY:

    Seems to me you could have written this three times now. For instance…

    Feb. 2005-the chances of another ipod is very slim.

    Feb. 2009-the chances of another ipod or iphone is very slim.

    And of course your comment of today.

    Maybe bookmark this for your fourth comment in a couple of years.

  29. cognos says:

    Apple has never really acquired a company over $1B. This is typically the move of bad companies.

    Apple needs ZERO excess cash quarterly. Their eps undersates cash-flow. They do not “capitalize” R&D or much other spending (prob do capitalize those strategic inventory arrangements… but thats $1-2b vs $10b in quarterly cash generation).

    Say this was 2009 and the stock was down from $200/shr to $90. They had $30/shr in cash. Should they have bought back 1/3 of company? Did they need the cash for anything? Should they have borrowed another $20 and bought back half the company then?

    Why not now?

    Divends suck… all about buybacks. See AZO, IBM.

  30. Theravadin says:

    Totally agree that dividending out the cash horde would be silly… but so is sitting on it. The time has long passed when Apple had a credible rainy day/secret plan argument- looks more like poor capital management now. Apple has done some things brilliantly – design, marketing, supply chain management… but capital resource deployment isn’t one of them. For the past few years they haven’t had to… which is the problem, in a nutshell.

    I’ll never understand, for instance, why they didn’t buy RIM when it was in mid single figures. It was a falling knife, but it had some huge benefitss for Apple – key patents, brand credibility in the hardest of security consciou business environments, and dominant presence in markets where Apple didn’t exist (Indonesia…), plus, in QNX, entre to a whole area of software (cars…) which would be a marvelus fit with Apple. I was holding my breath that they wouldn’t make a run at RIM, since I felt they could get it for less than it was worth.

    These sorts of areas like capital resource deployment are the achilles heal of Apple. Not insoluble, but they should get out there and hire a very smart team on that side of the business immediately.

  31. wally says:

    The lure of large numbers is what makes this one stand out today. Like you, I owned it back in the 90′s… but sold after a 5X increase in value. I don’t see anybody making 500% percent today, however, because there is no growth path left for them.
    They will now follow the path of Xerox, Nokia, Microsoft, HP…. other tech giants that got “commoditized” but hung around long after (a horde of cash is nice, but as Microsoft demonstrates, does not necessarily mean you can make any money from it).
    As we continue to move strongly to a wireless, connected world in entertainment, business and personal use, the makers of the ‘razors’ will get commoditized and the ones who sell the ‘blades’ (AT&T, Verizon) will have a continuous income stream.

  32. S Brennan says:

    franklin411,

    I am not the biggest Jobs fan on the planet for reasons I will not mention here…but:

    Jobs did take a company just 3 months from bankruptcy to become the highest valued anywhere…when you do that get back to me.

    As to your point that the ideas came from somewhere else, Jobs would be the 1st man to tell you he stole ideas shamelessly. And Jobs would also tell you there is a huge chasm between an “idea” and a 1st class product.

    As I said the other day on the subject of personal devices…QUALITY MATTERS…and to his everlasting memory, Steve Jobs understood this…

    Had Jobs not been cut out by Scully, we would have had a a better nation, as back in the day, Jobs not only understood products, he understood manufacturing.

  33. wally says:

    The notion that you should invest in a company because they hold cash is not very wise. What makes you think they can do anything with that cash that you cannot do directly?
    For instance… some suggest they might buy, say, Disney. So what? Buy Disney yourself then, not indirectly through somebody else. All they can do with cash is either buy an old, mature semi-profitable business or take a long-shot chance on startups. (Microsoft has tried both… no dice). You can do the same.

  34. [...] a fantastic post by Barry Ritholtz over at The Big Picture makes clear, what happened to Dell is a perfect reason why Apple should hold on to as much cash as [...]

  35. [...] a fantastic post by Barry Ritholtz over at The Big Picture makes clear, what happened to Dell is a perfect reason why Apple should hold on to as much cash as [...]

  36. techy says:

    greg I did not say its impossible. just that it is not the same anymore, what was there to create has been mostly done.

    those gadgets will keep getting better. But the probability of another game changing gadget like iPhone is very low. Its been 5 years since they did iPhone. and iPad was just an extension of iPod and iPhone. So why do you think we have a lull if they can create a monster every couple of years.

    Most people knew that touch screen was the way to go and pocket pc combined with cellphone is the future, but apple was the first one to crack it as the mature consumer product.

    Anyways all the aside, does anyone think they need 100 billion for R&D??

  37. td says:

    http://aswathdamodaran.blogspot.com/2013/02/financial-alchemy-david-einhorns-value.html?m=1

    This is Damodaran’s take down of Einhorn’s proposal which is a little OT but his comment about a “trust discount” relative to their war chest is spot on and gets to BR’s point…… yes they have given investors an amazing return but there isn’t a reason in the world for investors to applaud a pile of cash that is just sitting there.

  38. greg says:

    @ techy…Most people knew that touch screen was the way to go and pocket pc combined with cellphone is the future
    So Microsoft, Nokia, Samsung, Rimm, Palm, Ericsson, Motorola, Google, Dell and on and on just decided not to proceed with what they KNEW was the way to go. Interesting.
    And the ipad was just an extension of the ipod and iphone? Really? And yet again, no one else decided to capitalize on that obvious extension. Again, interesting.
    Perhaps we could say, that Apple “has always depended on the kindness of strangers.”

  39. socaljoe says:

    As owners of the company, the shareholders have the right to determine the strategic direction of the company. Management are employees working for the owners.

    I do not buy AAPL because I don’t trust management to not do something stupid with the cash, and owners have not been assertive enough. This is not unique to AAPL.

  40. [...] holdings and pumping profits into research and development was Apple’s way of guarding against becoming technologically irrelevant. Is Apple now a once-in-a-decade buying opportunity? Click here to get your 24-page Ultimate Cheat [...]

  41. [...] About It (NY Times Dealbook) A red light from Greenlight (Schumpeter Blog – The Economist) The Collossal Gall of Bad Apple Investors (The Big Picture – Barry Ritholtz) Financial Alchemy: David Einhorn’s “value” play for [...]

  42. ToNYC says:

    Apple doesn’t need Einhorn’s money, nor dance to his tune. He can go make something else as good with his money except leaning on the creators ’cause he has a big Jones for quick cash. Go pound sand, Dave, in your own box.

  43. [...] a fantastic post by Barry Ritholtz over at The Big Picture makes clear, what happened to Dell is a perfect reason why Apple should hold on to as much cash as [...]

  44. Joe Friday says:

    As of fiscal 2015, Apple will have $241 billion in cash.

  45. SecondLook says:

    I’m a little surprised at how, for the most part, posters are overlooking the key issue about Apple – that law of large numbers.

    Let me try to put in another way:

    Growth is limited. There are, ultimately, a finite amount of resources; when those resources are exhausted, growth stops. In the case of stocks, those resources are the number of investors who want to own part of a company, and how much available capital they have spend.

    For the top half a dozen companies by market cap, everyone who wants to own them, at their current prices, does. Future returns are pretty much going be matched more to the general growth of the economy and the stock market than anything else – that available capital.

  46. jrob says:

    In my humble opinion, Apple should use the money for buybacks, or at least the portion of it which they don’t foresee a potential use for which has at least a moderate probability of occurring and would not be covered by future cash flows. This would reduce investor’s fears of poor use of the cash, lower the PE ratio, and lower the amount of investors’ capital tied up in shares. Lower supply might help bring supply/demand back into balance, helping to make the valuation more reasonable.

    On the other hand, a low share price is probably useful when trying to attract and retain talent with stock options. So, supporting the stock price would create somewhat of a headwind for maintaining growth and innovation.

    Law of large numbers? No shit. Who hasn’t seen that coming? Maybe that’s the reason the PE ratio had steadily fallen from 40+ down to around 15? (Hint: YES) Does a company expected to continue growing earnings at 80%/year for several more years usually receive a PE of 15? NO! So, this was clearly not unexpected. So tell me, why does Apple deserve a 10 PE ratio now? And for added difficulty, try not using the phrase “broken stock”. And please, I would be grateful (seriously) if someone could give me an example of a substantially similar case of a strong company with such a poor valuation. I don’t know of any, and it is perplexing.

    And by the way BR, maybe those value guys citing PE ex cash were merely pointing out why it might be more relevant than plain PE. If Apple gave back all the cash, then PE would equal PE ex cash, right? (Just for argument’s sake, not advocating return of 100% of cash) . So this quarter, we would have been around a 6.5 PE. Please explain how that is rational, compared to say MSFT or GOOG.

    I would love to hear a good counter argument. But to date, I haven’t heard one which does not consist of only fears of future trends which have little basis in the current reality or acknowledge the strength of Apple’s current position.

    The truth is, they make fantastic and beautiful products, have a very efficient supply chain, and huge leverage on component purchases to support their margins. Why are consumers willing to pay more % wise? It is a relatively inexpensive luxury, for something used extensively every day. It makes a lot more sense than the extra dollar amount people pay for more expensive cars. My MacBook Pro is the first computer I ever really loved, and the iPhone is the first phone I ever loved. All the rest before it were shit, and all the rest after them are trying to copy it and then add a few things of their own (yes, I get it, there is certainly huge innovation outside Apple. But without Apple leading, it has tended to produce a pretty mediocre user experience. See PC, cell phones, tablets.) Is it more reasonable to think the people who have turned out such consistently superior products would continue to do the same, or that another company who has failed to innovate and lead previously, would suddenly become the innovation leader?

  47. abbyjoseph says:

    @BR Considering the sales data of last quarter, 56% of world wide sales come from iphone, shows performance dependence on one product. To me, it is the prime reason behind the recent downfall seen in the share prices of Apple Inc. Taking into account the performance at NASDAQ, if the company fails to project certain returns for the investors, obviously, irrespective of the previous performance of the stocks, the situation will become worse.

  48. [...] holdings and pumping profits into research and development was Apple’s way of guarding against becoming technologically irrelevant.  Whatever the outcome, this entire scenario is entirely consistent with West’s general [...]

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