Wednesday, December 13, 2017
Business

Apple's stock price not changing company's outlook

After soaring to more than $705 a share in September, Apple stock entered a months-long slide, closing Monday below $419. The reasons for the slide aren't secret and they aren't crazy: Samsung has proved it can produce excellent smartphones that people like, Amazon is making tablets, and Apple's iconic CEO is dead.

The past few months of modestly bad news and increased competition really have no bearing on the all-important question of whether the company can or will develop new blockbuster products in the years to come. But the recent weakness has opened the company's management up to second-guessing not only about its products but about corporate strategy—particularly its staggering $135 billion in accumulated cash and other short-term investments.

That's an awful lot of money. All the outstanding shares of Amazon combined, for example, are only worth $124 billion. McDonald's is worth $94 billion.

That's what makes the fall in share price so strange. One simple way of assessing a company's stock is to look at what's called the price-to-earnings ratio — the value of all its stock divided by a year's worth of profits. Apple's current PE ratio is 9.5, which is on the lowish side. That is the kind of ratio expected from a business that's sound but with a weak growth outlook.

But a simple PE ratio doesn't consider the value of cash on hand. If you assume each $1 that Apple has in the bank is worth $1, then the entire rest of the company — the patents, the personnel, the brand, the stores, the supplier relationships — is worth only $265 billion. That gives the business, viewed as an ongoing enterprise, a PE ratio of about 6.3. That's preposterously low. To look at it another way, you can take the inverse of a stock's PE ratio and get the earnings yield—the profits you would pocket if you bought the whole company. Excluding cash, Apple has an earnings yield of almost 16 percent. That's insanely high at a time when junk bonds are yielding less than 7 percent. Taken literally, that reflects an extraordinarily pessimistic view of a company that continues to offer the world's most popular smartphone, most popular tablet and a growing PC business.

Which probably shows that we shouldn't take the stock price literally. The markets are sharply discounting the value of Apple's cash: They actually think it is worth less than face value. And that's why some Apple shareholders are increasingly vocal about the idea that they'd like some of it.

One idea is hedge-fund manager David Einhorn's proposal for Apple to issue preferred shares with a guaranteed lifetime dividend, cutely dubbed "iPrefs." Morgan Stanley's Katy Huberty thinks Apple can and will use its strong cash position to borrow money and pay shareholders. Warren Buffett has the most straightforward proposal of all: If Apple's large cash heap is causing its stock to be undervalued, why doesn't Apple spend the money on buying Apple stock?

These proposals all have different advantages and disadvantages, but Apple management deflects them all with vague allusions to strategic flexibility and the sensible observation that it's important to stay focused on the actual products rather than managing the share price.

This still raises the question of why piling up short-term securities is what Tim Cook wants to do with his profits. He could go out and spend it on sexy acquisitions to build strength in online services where the company is weak. He could follow in the footsteps of the rich tech companies of yesteryear and acquire content companies.

A more boring option would be to cut price and deliberately sacrifice short-term earnings for market share. Apple allegedly sells all the iPhones it can make, but it seems very likely that people would buy more Macs if they were cheaper. Apple's 30 percent cut of app sales seems steep, and it'd be easy to imagine deliberately sacrificing that revenue and other content sales commissions as a worthwhile investment in the overall strength of the platform.

Yet the sobering thought for Apple shareholders (a group that, full disclosure, includes me in a minor way) should be that if management doesn't want to do anything with the cash, nobody can stop them. A $40 billion company with $13.5 billion cash on hand and a 9.5 PE ratio would be a tempting leveraged-buyout target for a daring corporate raider. But with the largest buyout in history having topped off at an inflation-adjusted $57 billion way back in 1989, Apple is much too large to swallow. And unlike at Google or Amazon or Facebook, nobody involved in running Apple owns a large share of it, so they have no particularly compelling reason to care what shareholders think. And the very size of the cash stockpile means there's no plausible scenario under which they'd need to turn to financial markets for investment funds of any kind. Apple executives are free to do whatever they want with that money and essentially always will be. And that growing realization is likely exactly what's turned markets against the company.

Comments
Flipping homes for big profits is getting harder in Tampa Bay

Flipping homes for big profits is getting harder in Tampa Bay

Michael Sadeghpour was just 18 when he did his first flip.Using money saved from a job and borrowed from his grandmother, he bought a foreclosed condo in north Pinellas County for $67,000. He did some inexpensive renovations and flipped it for $125,0...
Updated: 12 hours ago
Career Q&A: Two bosses who don’t care for each other

Career Q&A: Two bosses who don’t care for each other

Q: I seem to be caught between two high-level managers who really don’t like each other. One is a director, the other is a vice president, and I am an assistant to both. Whenever the director stops by my desk to chat, she makes critical remarks about...
Updated: 7 hours ago
Nicko’s Fine Foods, classic diner and Seminole Heights icon, closes after six decades

Nicko’s Fine Foods, classic diner and Seminole Heights icon, closes after six decades

Nicko’s Fine Foods, known as the place Elvis Presley ate following a 1956 concert and Tampa’s last classic prefabricated diner, has shut down after more than 60 years in business.Owners Karen and Nicholas Liakos could not be reached for comment, but ...
Updated: 9 hours ago
Ex-Facebook VP: Social media destroying society with ‘dopamine-driven feedback loops’

Ex-Facebook VP: Social media destroying society with ‘dopamine-driven feedback loops’

Washington PostA former Facebook executive is making waves after he spoke out about his "tremendous guilt" over growing the social network, which he feels has eroded "the core foundations of how people behave by and between each other."Chamath Paliha...
Updated: 11 hours ago
Illegal card skimmer discoveries in Tampa Bay double in 2017

Illegal card skimmer discoveries in Tampa Bay double in 2017

State investigators have discovered more than double the number of credit card skimmers in the Tampa Bay area in 2017 than in 2016 — with still a few weeks left in the year. The Florida Department of Agriculture and Consumer Services found 54 skimmer...
Updated: 12 hours ago
French group to take over Westfield malls for $15.7 billion

French group to take over Westfield malls for $15.7 billion

Three Tampa Bay malls may soon be under new management. French real estate company Unibail-Rodamco has agreed to buy Australia-based shopping mall operator Westfield Corp. for $15.7 billion in cash and shares."Westfield would arguably be the best or ...
Published: 12/12/17
Tampa Bay’s mortgage delinquency rate crept up in September

Tampa Bay’s mortgage delinquency rate crept up in September

Times Staff WriterThe percentage of Tampa Bay homeowners who are late on their mortgage payments rose slightly in September, probably due to Hurricane Irma. According to CoreLogic, 7 percent of bay area mortgages were delinquent by at least 30 days c...
Published: 12/12/17
Unusual paddle design earns worldwide market

Unusual paddle design earns worldwide market

Paddling on the heels of the last supermoon of 2017, Phil Hughes navigated an uncommonly low tide off Dunedin through St. Joseph Sound on an effortless but lengthy glide.This is not easy water, nor an easy paddle, and could be especially daunting for...
Published: 12/12/17
Punit Shah’s Liberty Group building new Channel District hotel with Jameis Winston as limited investor

Punit Shah’s Liberty Group building new Channel District hotel with Jameis Winston as limited investor

TAMPA — Punit Shah’s Liberty Group announced plans Tuesday to start construction in January on a Channel District project that will include a Hampton Inn and Home2 Suites, both by Hilton, plus a Starbucks Coffee.Financing for the $40 million project ...
Published: 12/12/17
Creating PDQ from scratch: CEO of growing brand came from Bucs’ front office

Creating PDQ from scratch: CEO of growing brand came from Bucs’ front office

Shortly after leaving his job as chief financial officer of the Tampa Bay Buccaneers to strike out on his own as an entrepreneur, Nick Reader wondered if he’d made the right move. "I probably had one of the coolest jobs in Tampa," said Reader, 42. Si...
Published: 12/12/17