Is this the best Apple can do with $14bn?

This Friday, Apple’s shareholders have a decision to make. They have the opportunity to vote on the $50bn share buyback proposal, which has been put forward by a powerful hedge fund and activist shareholder Carl Icahn.

Apple is the world’s largest company (for the moment!) and is sitting on the world’s largest corporate cash pile – some $140bn. The activists are calling on Apple to dig deep into these reserves to buy a whole load of Apple shares. They say that would drive the share price up, acting as a tax-efficient way of returning cash to shareholders.

Now, it turns out that Apple has actually been actively buying back shares anyway – $14bn of them. It turns out that CEO Tim Cook was on the same page as the activists all along. So much so, in fact, that Carl Icahn has backed away from his own proposal. It seems his heart is no longer in it.

And that makes me suspicious. What has caused such a reversal in Icahn’s strategy? And exactly why has Apple gone piling into its own shares?

Well, let me explain what’s happened, and why Carl Icahn may be getting cold feet about Apple.

Why Apple’s buybacks are bad news for shareholders

So Apple has invested $14bn in its own stock in the last month alone. But it hasn’t resulted in the share price appreciation you and I might expect. In fact, the shares have been slipping. I’ll get onto how you could make money from that towards the end of this note.

Cook says the firm has been aggressive and opportunistic in its purchases. He says he’s got ‘faith’ in Apple – so he’s investing in it even as Wall Street turns its nose up.

Hmm. Apple’s board clearly believe they can outwit the market. And that’s set my alarm bells ringing for three big reasons.

1. Engineering your own share price is a bad idea

First and foremost, Apple is not a hedge fund. Apple never wanted to go for Icahn’s proposal to buy back a minimum $50bn in stock over the course of this year. This proposal would make the company a forced buyer – perhaps paying too much for the stock. Instead, Apple wants to buy back stock on its own terms.

Cook wants to be opportunistic and buy when shares are cheap. But how does he know they won’t get cheaper? He doesn’t! All he can hope to do is to help give the share price a short-term boost at times when the market isn’t interested in the stock. What they’re doing is offering shareholders that want to dump the stock an opportunity to do so, leaving Apple to pay an over-inflated price.

2.  It just shows Apple doesn’t have anything better to do with its cash

Great businesses don’t have a problem investing cash for growth. It’s only when there’s a lack of profitable opportunity that the business uses leftover cash to buy back shares and cancel them. This is pure financial engineering. With fewer shares in issue, it drives up earnings per share –  ie, they are buying in growth.

And it’s the concern that the business isn’t growing that’s got investors spooked right now. It’s why Apple’s share price is sliding despite the gargantuan sums of money being thrown at it.  And it brings us neatly to the third reason for concern.

3. Taking over companies is getting very expensive

Many believe the real reason Apple has been sitting on this war chest is because it’s just waiting to pounce on a competitor. Indeed, Cook says: “We have no problem spending ten figures for the right company, for the right fit that’s in the best interest of Apple in the long-term.”

Yet bid targets are getting increasingly expensive. This week’s announcement that WhatsApp is to be gobbled up by Facebook came with a whopping $19bn price tag. That’s for a company generating $20m in sales. And that’s sales, not profit!

Given that Apple is losing market share hand over fist in the smartphone market, many believe it’s going to have to do something big. And something big could just about mark Apple’s market top.

How to profit? Short Apple, long Google

Personally, I think Google is a much safer bet than Apple. There are just too many grey areas developing around Apple’s strategy. Google knows where it wants to go, and it’s making strategic moves both in acquisitions and organic growth.

Last week, I proposed a trade to profit from this divergence between the two tech titans of Apple and Google. That trade is already in the money. In just a week, Apple is down about 3%, while Google is up about 1.5%. This is a good start. If the trade continues on course, I think it’s going to be a great long-term way of playing Apple’s de-rating – and, of course, Google’s bid for global supremacy!

The first phase of this trade will see Google overtake Apple as the biggest corporation in the world.

I’m going to give that about a year.

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  • IJ1

    Bengt. In light of several factors, i think long google / short apple is way too close a call. Broadly speaking, a lot of the rationale (Google growth opp versus Apple ex-growth etc) has already been priced in. Google is beloved by all by now, the number 1 “hedge fund hotel”, making it vulnerable to disappointments, while the market is already unexcited about Apple, making it sensitive to positives surprises. Addressing each of your points on Apple’s cashpile in turn: 1) I agree, and am anti-buybacks too, but I really wouldn’t want to be short if they do announce a $50 bn buyback. This would involve a lot of pain, and I know from bitter experience how awful it feels. 2) Maybe they don’t for now, but sitting on cash, waiting for better opportunities, might be very wise. 3) Same as 2): i think it would be a stroke of genius (albeit incredibly hard to pull off psychologically) if Apple can refrain from any acquisitions until this tech bubble 2 bursts: and burst it will. With $140 bn in cash, Apple would be able to clean up somewhere down the line. As an aside, you know Apple’s cashpile is enough to buy all 5 of the Russian giants you recommended in your Russia article?

  • CT

    I have read a few of these posts and I think there is one key element that perhaps has been overlooked. From a customer perspective, Apple is a far superior user experience to Android. I have a huge amount of time for Bengt and his articles but simply can not agree on this one. Through iCloud and iTunes Apple lock their customers in. Customers are happy to be locked in because they know that what they are getting is far superior to anything else out there. It is about the usability of the software. Quite simply going to Android is an unnecessary, difficult and inferior service. I know a few who have tried, hated the experience and returned to Apple. So whilst they may be loosing market share, they will likely be able to generate continued growth and great returns out of many loyal and happy followers who won’t move to anything else. It has been a marketing strategy that many others would do well to replicate.

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