AAPL - Apple Inc.

[KCLarkin]

This company has done zero to demonstrate they can innovate without Jobs.

 

The answer is that Apple remains innovative today, according to Wharton experts, and any doubts about it stem from a limited understanding of what innovation entails. Wharton management professor Paul Nary said it is important to distinguish between invention and innovation. Invention is the creation of a new idea or opportunity while innovation “generally means a successful commercialization of a new technology or a new business model, usually by recombining it with other pre-existing elements, and making the possibility, stemming from the invention, into a market reality.” From this viewpoint, he said, Apple is innovative.

 

http://knowledge.wharton.upenn.edu/article/apple-innovation-edge/

[Gregmal]

This company has done zero to demonstrate they can innovate without Jobs.

 

The answer is that Apple remains innovative today, according to Wharton experts, and any doubts about it stem from a limited understanding of what innovation entails. Wharton management professor Paul Nary said it is important to distinguish between invention and innovation. Invention is the creation of a new idea or opportunity while innovation “generally means a successful commercialization of a new technology or a new business model, usually by recombining it with other pre-existing elements, and making the possibility, stemming from the invention, into a market reality.” From this viewpoint, he said, Apple is innovative.

 

http://knowledge.wharton.upenn.edu/article/apple-innovation-edge/

 

I guess I will clarify my terminology. Apple became what it is now, because of Steve Jobs' magic. Whether invention/innovation, AAPL has largely ridden the coattails of this since his death. There will come a point where they will need to do something new, and I don't think it s a sure bet that they will. At best, I think one should hope they kind of become what Microsoft turned in to.

 

When Tim Cook took over, everyone was worried about what Apple could do next. It seemed those questions stopped once Buffett bought in. But to me at least, they haven't demonstrated the ability to do anything truly unique post Jobs. Everything has more or less been iPhone add ons, and their biggest venture, the electric car, seems to have been a failure.

[johnny]

I'm not sure the innovation/invention dichotomy is the useful one here. I think it really boils down to rigorously defining what we mean by "innovation". Product innovation isn't necessarily business model innovation. Business model innovation is what was going on during the Steve days, and to some extent it provides the long-term foundation for successful product innovation. The argument here isn't that Apple isn't innovating, it's that all of its current product innovation is a logical and technological continuation of a business model innovation that happened about a decade ago. Which mean that, while Steve is gone, we're still enjoying some Steve dividends, and it may not be prudent to model those into perpetuity since Apple is eventually going to run out of problems to solve by building new products around last years iPhone mainboards. And what happens when we get to -that- world is the relevant question to answer when deciding if this is a company that deserves a 10 multiple or a 20.

[John Hjorth]

Nikkei Asian Review [January 9^th 2019]: Exclusive - Apple cuts iPhone production plan by 10%.

[gfp]

I was going through Apple's recently filed proxy and noticed that it appears they drastically reduced share repurchase activity in their Q1 (9/29/18-12/31/18).  Using outstanding shares (not fully diluted or any of the period average share counts), it looks like they had 4.754986 Billion shares outstanding on 9/29 and the proxy lists 4.729803 Billion shares on 1/2/2019 (close enough to quarter end with the holiday and all).

 

So that is only a net reduction of 25.183 million shares for the quarter, or approximately $4.722 Billion worth of shares for a company that had been repurchasing 19-23 Billion dollars worth of stock each quarter for the preceding 3 quarters -

https://s22.q4cdn.com/396847794/files/doc_financials/quarterly/2018/Q4/Apple-Return-of-Capital-and-Net-Cash-Position-Q4'18.pdf

 

 

I guess this explains the net cash build of +$7 Billion they indicated in the pre-announcement, with net cash as defined by Apple going from $123 Billion to $130 Billion for the quarter.

 

 

[rkbabang]

I was going through Apple's recently filed proxy and noticed that it appears they drastically reduced share repurchase activity in their Q1 (9/29/18-12/31/18).  Using outstanding shares (not fully diluted or any of the period average share counts), it looks like they had 4.754986 Billion shares outstanding on 9/29 and the proxy lists 4.729803 Billion shares on 1/2/2019 (close enough to quarter end with the holiday and all).

 

So that is only a net reduction of 25.183 million shares for the quarter, or approximately $4.722 Billion worth of shares for a company that had been repurchasing 19-23 Billion dollars worth of stock each quarter for the preceding 3 quarters -

https://s22.q4cdn.com/396847794/files/doc_financials/quarterly/2018/Q4/Apple-Return-of-Capital-and-Net-Cash-Position-Q4'18.pdf

 

 

I guess this explains the net cash build of +$7 Billion they indicated in the pre-announcement, with net cash as defined by Apple going from $123 Billion to $130 Billion for the quarter.

 

That was some good market timing on Apple if they make up for it by buying back $40B this quarter.  We can only hope.

 

 

[Jurgis]

I guess we will see if that was a valuation call or if they are like other companies that buyback when things are great, but stop buying when business is not that great. Will be interesting to see Q2 repurchases. Thanks for posting globalfinancepartners.

[SlowAppreciation]

Also possible they knew rev would disappoint (i.e. had material nonpublic information) so from a legal/ethical standpoint, best not to take any action re: buybacks until it became public. But just a guess...

[SHDL]

I have a somewhat related, more general question about share buybacks in case anyone knows the answer: 

 

Let’s say I’m running a company that has a lot of cash and I’m thinking about doing a share buyback.  Is it okay if I first release some bad news about the company to make the stock price go down and then start buying back shares? 

 

My guess is that there are regulations in place that are designed to prohibit or at least discourage such shady actions, but I’m not at all sure how regulators could enforce that. 

[Jurgis]

I have a somewhat related, more general question about share buybacks in case anyone knows the answer: 

 

Let’s say I’m running a company that has a lot of cash and I’m thinking about doing a share buyback.  Is it okay if I first release some bad news about the company to make the stock price go down and then start buying back shares? 

 

My guess is that there are regulations in place that are designed to prohibit or at least discourage such shady actions, but I’m not at all sure how regulators could enforce that.

 

In my very non-lawyerly opinion: company is likely to get class-action sued after releasing bad news anyway. If it made any noises internally (e-mails and all that), that "we will buy back stock when it drops after releasing bad news" and these would become known to class-action lawyers, they'd likely have even better case against company. So probably nobody in company says that explicitly although some people may think of doing it.

 

Most companies though (as I said above) buy shares when things are rosy, and stop buying when they are not. So not many occurences of your scenario IMO.

 

But some lawyer input might be interesting.

[johnny]

It would be an understatement to say their buyback activity has, historically, been poorly timed. It's more like it has been precisely anti-timed; the quarters with the highest number of retired shares are also the quarters with the highest share price.

 

That said, there's now an investor that has opinions about this sort of thing, and enough weight to make the board move. So maybe Tim is receiving some gentle folksy tutelage on the topic from a certain octogenarian.

[SHDL]

I have a somewhat related, more general question about share buybacks in case anyone knows the answer: 

 

Let’s say I’m running a company that has a lot of cash and I’m thinking about doing a share buyback.  Is it okay if I first release some bad news about the company to make the stock price go down and then start buying back shares? 

 

My guess is that there are regulations in place that are designed to prohibit or at least discourage such shady actions, but I’m not at all sure how regulators could enforce that.

 

In my very non-lawyerly opinion: company is likely to get class-action sued after releasing bad news anyway. If it made any noises internally (e-mails and all that), that "we will buy back stock when it drops after releasing bad news" and these would become known to class-action lawyers, they'd likely have even better case against company. So probably nobody in company says that explicitly although some people may think of doing it.

 

Most companies though (as I said above) buy shares when things are rosy, and stop buying when they are not. So not many occurences of your scenario IMO.

 

But some lawyer input might be interesting.

 

The threat of lawsuits might do the trick, but I see certain difficulties with that too…  For instance, are shareholders going to demand an investigation every time the company reports bad numbers and the stock goes down?

 

I think you’re right that most companies — for whatever reason — don’t seem to be fully exploiting this “opportunity” (to create value for long term shareholders).  The question I had in mind was whether that is because of a regulation of some kind or something else.  I think this is interesting because if there is in fact some regulation and it's draconian enough, that could very well explain why most share buybacks tend to be so badly timed.

[Jurgis]

Ah, now I understand your question.

I don't know the answer.  :-\

[Viking]

Based on the pre annoucement release i would expect Apple to be aggressively buying back shares this quarter and all this year.

 

“Looking Ahead

Our profitability and cash flow generation are strong, and we expect to exit the quarter with approximately $130 billion in net cash. As we have stated before, we plan to become net-cash neutral over time.”

 

The Presidency will be up in less than 20 months. There is a reasonable chance the Democtrats will get control of Presidency, House and Senate. If this happens we likely will see changes to corporate tax rates and perhaps also repatriation taxes. We KNOW it will not get any better than it is today. All US corporation with large amounts of cash overseas have been given a gift. I would expect Apple to be very aggressive with buybacks and frontload any plans. Something along the lines of “1 bird in the hand is worth 2 birds in the bush”. The buyback bird has arrived and is singing very loudly  :-)

[aws]

I thought the repatriation was mandatory, so the tax is already set whether they bring it back or not.  They have 8 years to pay the tax IIRC and it's peanuts that needs to be paid initially so maybe that schedule could change, but I don't think congress can just go retax the same money again.  So I doubt fear of tax changes would motivate them to reduce their cash balances, rather they just finally are able to and are reducing cash in an orderly manner.

[Spekulatius]

I thought the repatriation was mandatory, so the tax is already set whether they bring it back or not.  They have 8 years to pay the tax IIRC and it's peanuts that needs to be paid initially so maybe that schedule could change, but I don't think congress can just go retax the same money again.  So I doubt fear of tax changes would motivate them to reduce their cash balances, rather they just finally are able to and are reducing cash in an orderly manner.

 

Tax changes would not be applied retroactively to transactions that already occurred. It’s an old rule that laws should never been applied retroactively (since Roman law) but there have been cases where this rule was bent or broken....

[Viking]

I thought the repatriation was mandatory, so the tax is already set whether they bring it back or not.  They have 8 years to pay the tax IIRC and it's peanuts that needs to be paid initially so maybe that schedule could change, but I don't think congress can just go retax the same money again.  So I doubt fear of tax changes would motivate them to reduce their cash balances, rather they just finally are able to and are reducing cash in an orderly manner.

 

Future government in the US are going to be running larger and larger deficits. When the Democrats get back in power they will need to look after their base. It makes sense to me that corporate taxes will be increasng down the road. What the changes look like is unknowable. My point is Apple would be well served to fully take advantage of the current tax situation.

[boilermaker75]

I went by the Apple store at Westfield Mall in LA today. It was packed. I tried to count, but couldn't. There were at least 140 people in there.

 

Apple stores are always crowded. This shows status quo.

[DCG]

Seems like they just got way too greedy with pricing. I'd love to get a new iPhone, but paying $1000 (+ tax) for a phone seems pretty ridiculous. Would be one thing if you paid that much and the phone lasted a long time. You pay that much, and then just 2 years later, they make sure your phone runs super slowly and that the battery craps out.

[rkbabang]

Seems like they just got way too greedy with pricing. I'd love to get a new iPhone, but paying $1000 (+ tax) for a phone seems pretty ridiculous. Would be one thing if you paid that much and the phone lasted a long time. You pay that much, and then just 2 years later, they make sure your phone runs super slowly and that the battery craps out.

 

There are 7.6 Billion people on Earth.  There are over 5 Billion with mobile phones, but only a little over half have smartphones. But an average of 66% of new subscribers are smartphones.

( https://www.businessinsider.com/world-population-mobile-devices-2017-9

  https://www.gsmaintelligence.com/research/?file=3df1b7d57b1e63a0cbc3d585feb82dc2&download )

 

The world is getting less poor. About 130,000 people per day escaping extreme poverty for example.

 

Is it not unreasonable to think that eventually there will be 7 Billion mobile users and 5-6 Billion smartphone users?  And for Apple to become a luxury brand and find enough buyers to sell 50M+ high priced phones per year fairly consistently?  Plus watches and other products?  The growth will slow, but it could become a study as she goes business that generates a lot of cash, buys back a lot of shares, and pays a nice dividend for the foreseeable future.  Also with an option on any new innovations/products that they do come up with in the future.  People are freaking because the growth rate has slowed down, but Apple isn't really priced for growth anyway (12 P/E).

 

[rkbabang]

Or are we looking at

 

"The End of Apple"

https://www.forbes.com/sites/stephenmcbride1/2019/01/21/the-end-of-apple/#3ceaf6d6dc05

[fareastwarriors]

Seems like they just got way too greedy with pricing. I'd love to get a new iPhone, but paying $1000 (+ tax) for a phone seems pretty ridiculous. Would be one thing if you paid that much and the phone lasted a long time. You pay that much, and then just 2 years later, they make sure your phone runs super slowly and that the battery craps out.

 

I think upgrading every 2 years is the right balance value and latest tech. I basically no longer use a laptop, tablet, or even my big screen TV. The phone is my primary device. For that kind of usage and value, it's worth the $1,000.

[DCG]

Another area where I feel like they've made a mistake is offering multiple iPhones at a time. The common (non-techie) consumer doesn't really understand the differences between the XS, XR, XS Max, and X. Then they still also have the 8, 8 plus, 7, 7 plus etc.. still available.

 

They should be offering one single iPhone each year (which should currently be the XS.

 

 

Offering too many products is a key thing that got Apple into trouble before Steve Jobs changed it. They seem to be continuing to go back down the path of having too many products.

[rkbabang]

Another area where I feel like they've made a mistake is offering multiple iPhones at a time. The common (non-techie) consumer doesn't really understand the differences between the XS, XR, XS Max, and X. Then they still also have the 8, 8 plus, 7, 7 plus etc.. still available.

 

They should be offering one single iPhone each year (which should currently be the XS.

 

 

Offering too many products is a key thing that got Apple into trouble before Steve Jobs changed it. They seem to be continuing to go back down the path of having too many products.

 

I agree, but maybe a big and a little  the XS and XS max, that's it.  People understand big screen/small screen.  And some prefer one to the other.

 

[Viking]

Tim Cook, in Apple’s recent news release, stated that “we plan to become net-cash neutral over time.”

 

Does this mean Apple plans to spend much of the $130 billion net cash? On share buybacks? Have they ever discussed timing or how fast they will get to net-cash neutral?

 

They should earn around $55 billion this year. If they utilize $25 billion of their net cash they will have about $80 billion for buybacks. This would allow them to retire 10% of shares outstanding. Do that for a couple of years in a row and we will see meaningful share reductions.

 

Apple has been bringing their share count down meaningfully for years.

 

“Looking ahead our profitability and cash flow generation are strong, and we expect to exit the quarter with approximately $130 billion in net cash. As we have stated before, we plan to become net-cash neutral over time.”