Tim Cook's leadership in the past year has improved Apple's (AAPL) operational efficiency and has continued the company's momentum to provide incredible value to shareholders. However, investors have lost confidence in Apple, and stock price has declined from $700 to $420 since October 2012. It's also been correlated that in the past six times that Cook has made a public appearance, AAPL stock has closed down.
But Apple's recent slump is not warranted for numerous reasons:
- Balance sheet is strong with zero debt and $137 billion of free capital
- P/E ratio is low at only 9.8x
- Posted a record quarterly revenue of $54.5 billion, and record quarterly net profit of $13.1 billion in 2013 Q1
- Sold a record number of iPhones and iPads in 2013 Q1
- Gross margin of 38.6% (declining, but still high)
- Significant potential for growth in international markets such as China and India
- Significant potential for growth in enterprise adoption
Cook has so far managed the company with Apple's best interests in mind, but should he take this opportunity at Warren Buffett's advisement to return value to shareholders and buyback shares, or would using available capital for reinvestment in current operations and acquisitions do more to restore both investor and consumer confidence? What Would Steve Jobs Do?
Improvements Under Tim Cook's Leadership
Prior to taking on the leadership of CEO and stepping into Steve Jobs' shoes, Tim Cook was Apple's Chief Operating Officer with 13 years of Apple blood running through his veins. Improvements to operational efficiency went unnoticed as Apple's success over the past decade was mostly attributed to the revolutionary products and out-of-the box marketing. Cook strengthened Apple's cooperation with contract manufacturers in China, increased margins, and has greatly improved the operational efficiency of Apple's supply chain. Cook's management style has shifted Apple to operate more conservatively, rather than focusing on pushing the envelope of engineering.
iPhones and iPads have posted record sales throughout Cook's reign, and product releases with only evolutionary technological improvements were brilliantly executed. The first generation iPad Mini was released without Retina Display to compete with other same sized tablets at a similar price point -- an iPad Mini with Retina Display would be developed in the 2nd generation model. This ensured that price-conscious consumers would be satisfied with their purchase, as no better iPad Mini is available. Consumers who value the higher quality product either purchase the more profitable iPad, or wait for the 2nd generation iPad Mini with Retina Display. This then ensures that the 2nd generation model will still be highly attractive to consumers, even with no major technological advances (any new developments would only be a bonus to consumer expectations).
However, there has been much oversight in the product line and the reputation of iOS has suffered. Jobs would have lost his mind to the criticism and issues surrounding the releases of Apple Maps and Siri. There has been little innovation in iOS, while Google (GOOG) Android and Samsung (GM:SSNLF) capabilities are ever-improving. Apple's large cash balance could no doubt be spent on expanding both software and hardware development.
Share Repurchase And Warren Buffett's Advice
Warren Buffet's use of available Berkshire Hathaway capital follows a hierarchy before paying cash dividends:
- Reinvestment possibilities and intelligently deploying funds in current business such as projects to improve efficiency, expand territorially, or extend and improve product lines
- Acquisitions that add value to shareholders
- Repurchase of shares, only if they are at a meaningful discount to the intrinsic value. Buffett: "It's hard to go wrong when you're buying dollar bills for 80¢ or less." (March 1, 2013 Berkshire Hathaway Letter to Shareholders)
Apple has myriad possibilities to spend its cash to expand and improve operations before issuing permanent preferred shares. This includes capital spent on store openings in emerging markets in China and India, increased product development spending for both hardware and software (iOS improvements, lower end iPhones, wearable electronics...), and also acquisitions. As Cook stated in March 2012:
"We have used some of our cash to make great investments in our business through increased research and development, acquisitions, new retail store openings, strategic prepayments and capital expenditures in our supply chain, and building out our infrastructure. You'll see more of all of these in the future." (March 19 2012 Press Release on initiating dividend and share repurchase program)
Apple might be on the right track, and as it was advised during Warren Buffett's appearance CNBC Squawk Box on March 4th, Apple should ignore David Einhorn's push for permanent preferred shares, and should continue to "run the business in such a manner as to create the most value over the next five or ten years." Regardless of any potential plans to issue shares or dividend payments, the key takeaway is that Apple should focus on running the business to create more value. And from a Steve Jobs perspective, it is to continually to innovate.
Apple's approval of a $10 billion share repurchase program to be executed over three years, commencing in its 2013 fiscal year (began September 30, 2012) was announced in March 2012. With AAPL trading at lows of $420, Apple's window of opportunity for share repurchase has opened. Cook has never followed a WWJD approach, and has always considered what is best for Apple. Jobs overlooked Buffett's suggestion of share buybacks when AAPL was trading around $200, even when he agreed that the stock was undervalued. Should Apple's share repurchase program be expedited, or other reinvestment opportunities to grow value to shareholders be explored?
AAPL's recent lows are unwarranted based on the company's strong performance and future growth potential. Cook has managed to improve operational efficiency and has created significant value for shareholders over the past year. At the same time, lack of major improvements in both hardware and software have reduced investor confidence. Among numerous possibilities for reinvestment and acquisitions, an opportunity for share repurchase has surfaced. While everyone knows what Buffett would do, perhaps Tim Cook should also ask, What Would Jobs Do?