Five Apple Predictions for 2009 17 comments
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1. THE CASH KEEPS PILING UP. Everyone KNOWS Apple (AAPL) is sitting on a horde of cash. Very few acknowledge that pile is going to get lots bigger. This quarter Apple reported $24.5 billion in cash and short term investments, a whopping $9 billion increase in one year! That dollar position is going to get a lot juicier. So let's make a stab at it.
What will Apple's cash position be next quarter? In a year? Next quarter should easily see a $4 billion rise (after all we almost saw that increase last quarter and lots more iPhones were sold). As to 2009, how about an additional $12 billion to cash making it $36.5 billion. The point is that the investing public isn't following the money. Does anyone think Apple's cash will stagnate here? The cash will keep stacking up. The question is: when will the share price reflect Apple's stash. When it reaches, 40% of market cap? 50%?
Below is a graph of Apple's cash (including short term investments). If the trend holds, cash will exceed market caps by 2012. Whether or not that is realistic, I leave it to you as an investor. Again, the market is ignoring the powerful cash building. When will the stock price reflect the dramatic stacking of Apple dollars? (see chart below)
2. THE WORLD IS GOING NON-GAAP AND SO SHOULD YOU. Apple makes its money two ways: earnings that are booked as they happen (Macs, iPods, software) and earnings that are deferred (iPhones). The deferred earnings have dribbled agonizingly slowly in Apple's GAAP accounting. It's kind of silly to delay booking earnings that have occurred a year or more ago. Those deferred earnings are in reality gigantic. Why wait?
In a recent article (Apple's Time For Greatness Is Now), I begged Apple to PLEASE give investors the earnings of their iPhones as they occur and the company did (I don't think it was the article that did the trick). Last quarter it reported both GAAP (old way) and non-GAAP (new way) earnings. By doing so, Q4 2008 earnings went from $1.26 (GAAP) to $2.69 (non-GAAP) a share. Apple sold over 6 million iPhones last quarterm, boosting its earnings over a 100%. Investor relations has told me that Apple plans on continuing to report non-GAAP earnings.
My second prediction is: Apple will report amazing non-GAAP earnings this coming quarter and year. Forget GAAP earnings. The company underestimates actual earnings by more than half because it ignores the big iPhone story. I predict $3 EPS for Q1 2009 and $12 EPS for 2009, numbers I think Apple will easily beat. (See chart below)
3. GUESS WHO PRESENTS JANUARY'S CONFERENCE CALL? Steve Jobs will again deliver the conference call (which will create a stir: wasn't he supposed to be dead? or was it dying?). Of course, he will appear thin again. Someday, after the world has hounded him enough, he will explain that he has been left with pancreatic insufficiency following his abdominal surgery. He now cannot easily absorb nutrients through his alimentary tract and has been left thin as a result. He is cancer free but is left with the unpleasant after affects of his surgery. I predict the gossiping will continue. Steve outlives most of the rumor mongers and retires at age 92 (under-nourished, thin people do tend to live longer).
4. EVERYONE'S BEEN DUMPING THEIR SHARES EXCEPT ONE GROUP OF INVESTORS. Apple shares are normally sold by insiders from time to time. THIS HAS BEEN A VERY UNUSUAL PERIOD MARKED BY LITTLE INSIDER SELLING. Not a lot of action selling here below $100. If Steve was on the way out, sales plummeting, and the story was over, wouldn't the guys at Apple be bailing?
5. AND, OF COURSE, THE FINAL PREDICTION. Apple shares go much higher.
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This article has 17 comments:
I am a contributor on www.thecreatingwealthb...
See: Journal of the American Geriatrics Society 2001:49(7):968-979.
High body mass index does not predict mortality in older people: analysis of the Longitudinal Study of Aging.
Grabowski DC, Ellis JE.
One counterargument to changing from GAAP is that the iPhone is accounted this way because Apple wanted to be able to provide free software updates, and this required subscription based (deferred revenue) GAAP accounting. I don't know the technical finance details of why this is the case but that's what one can find for a reason.
Regardless, the GAAP vs. non-GAAP hides the true power of Apple's current business model. I suspect they like it that way because it allows them to sneak up on the competition. There is no outright advantage (other than share price) for what Steve and Apple wish to do if they post those incredibly large non-GAAP figures, and the somewhat depressed share price probably keeps people working at Apple longer and harder than they would if it the shares went so high that even the janitors became millionaires.
I predict AAPL moves to $115-$120 by the end of January based upon Macworld and the earnings announcements. This is an incredible investment opportunity at the current price.
Grow it to $50B and then buy MSFT. That's one way to get Mac OS X 90% market share. ;-)
Answer: Would Apple have been wiser to have used its cash to buy back its shares when it reached $200? Last year lots of companies bought themselves when their stocks were far higher, leaving themselves a whole lot poorer and starved for cash.
Would Apple have put their cash to good use by buying another company? Should they have taken a cue from Manitowec's purchase of Enodis. How about Macy's buying Mays? Think how BHP would have looked if it had succeeded in its quest of RTP?
Or, what if Apple had handed out their cash in big dividends? Apple would be facing the mother of all recessions with a far weaker hand. It's nice to have more cash on hand than any bank out there.
I'd say Apple has used its cash more wisely than most other companies out there.
( And, after all, they did launch the iPhone, iPod, iMac using a fraction of their money.)
1. They will need to do something with the cash. No question. More than likely it'll be a combination of acquisitions (more deals similar to PA Semi) and potentially a buy-back. (If you liked it at $200, you love it at $90 especially with short-term rates where they are.) Expecting a long-term return of 8-10% from here would not be crazy.
2. The current environment begs for accounting rigor, not arbitrary non-GAAP earnings. However, I think the iPhone contribution should be highlighted and broken out on a non-GAAP basis without the deferral.
Keep in mind though, the deferred revenue story is at least partly baked in already because it's been discussed a fair amount.
3. Pancreatic cancer is highly lethal. I lost my father to it one month after he was diagnosed. That being said, I think Steve would hang it up if he was told he was going out feet first in a short time.
4. Over the last six months, there have been 8 insider sales for a total of 6% of the stock held by the group. There have been 0 insider buys. Call me when the number reverses.
5. It might go up... but will it outperform??
One thing I might add, Apple has ZERO debt. It's probably "breathed a sigh of relief" a few times knowing there was no refi risk. I would think that lack of debt risk in today's market would get the company some kind of equity premium. Or maybe that's why the stock isn't at $70...
Good piece.
Also, not making a major acquisition is not a bad strategy as well. I am glad they didn't do any acquisition in 2008, Could you imagined if Apple had made an offer to buy Yahoo or adobe like some investors wanted?
The only concern I have with apple's cash pile is, It would be nice to diversify it with several currencies instead of putting all in dollars.
Jobs had a RARE form of pancreatic cancer that is curable...not the kind most people think of, which is usually quickly fatal. unfortunately, the cure leaves the person pretty skinny for their 'as long as average' lifespan.
Apple is using it's $ wisely, especially in an economy like this...but also because it's a tech company. they invest heavily in R & D. But saying that... in tech, where an out of sight, our of the blue invention or discovery can catch everyone with their pants down (as the iPhone did), it behooves the great tech companies to have lots and lots of cash on hand to weather the storm and outshine the new competition without putting the company at risk. I can't even imagine a safer tech stock than APPL or a company that has a larger, more brilliant staff.
long APPL
always something to consider for longer term investors looking 3-5 years out