They're Practically Giving Apple Away
Tim Cook, who has famously told investors he doesn't care about his stock price, actually cares a lot about his stock price.
With a $50 billion share buyback fueled by cheap debt, plus a higher dividend, Cook signaled to investors when he released earnings on April 23 that Apple is determined to raise its share price.
Since that announcement, it's up 13%. That's better than Microsoft, which is up just 10% in that time. But go back a month and Microsoft's gains are 17%, Apple's just 9%. Apple is practically having to pay people to hold its stock in order to keep up with its Redmond rival.
What's going on? Microsoft isn't paying people to own its stock. It's not gaining market share. Apple is doing both, yet it lags.
The truth is that, in technology, no one cares about what you've done but what you're going to do. The goodwill that's such a fungible commodity in every business means everything in technology. It's all about what they think you're going to do for them, not even what you have done. Despite everything Apple tries, most analysts don't think it's about to do much. The hype is about Google Glass, not the iPhone 6, or the 5S, or even the possibility of an Apple TV. Even MacWorld, which covers Apple exclusively, is bemoaning the sad state of the Apple rumor pipeline, even while noting that the iPod, which defined the company, wasn't even a rumor until a week before it was unveiled.
But Apple has grown more than 10%, year over year, as reported in its latest earnings statement. It still sports operating margins of 25%. It's now number six on the Fortune 500, up from number 17 a year ago. (Microsoft, by contrast, is number 35.)
Put a market multiple of 14.5 on the $41.89 in earnings Apple achieved in the last four quarters and this is a $600 stock. If it can even achieve the multiples of IBM it's a $550 stock, a price I consider fair. Microsoft, by contrast, is already trading at a premium to that, a hefty premium, with a PE of 17.36. Google, meanwhile, is trading at over 25 times earnings.
What's going on? The market doesn't think Apple can keep things going at the rate they're going. The market assumes that Google is going to blow them out of the water with Android, that Amazon is about to out-do them in sales of content, that Microsoft is about to stage a comeback, and that Apple's future is less vital to its past.
That's possible, but it's all speculation. Apple is still opening Apple stores, it's as The Inquirer notes diversifying away from its dependence on Samsung for chips, and it has expenses under control.
The $50 billion in buybacks will, over the course of the next year, take out about 10% of the common. This means an increase in earnings per share is baked in, if the company even matches its current execution.
From its current price, then, I think Apple has at least another 20% to run before it reaches a market value even somewhat equivalent to its main competitors. Maybe I'm crazy, but I'd still rather own Apple than any other tech stock on the board right now.
