Although it remains very much a head-scratcher to us, shares of Apple (AAPL) have continued to fall towards Jeff Gundlach's $425 price target. We've been mostly silent on the company's share slide, because, frankly, we don't think the fundamental story has changed at all. Recent news regarding the potential of the iWatch and the long-awaited iTV has piqued our interest, as we believe both could add upside to earnings.
Apple's design genius John Ive, known by some to be as integral to Apple's design as the late Steve Jobs, has spent years dissecting Nike (NKE) and other watches. We could speculate all day about the possibilities of an iWatch, but we find that this blog provides absolutely fantastic commentary. Likely, it will complement existing Apple devices, particularly the iPhone and iPad, and it could even include wireless charging. Regardless, we think the iWatch (assuming it does exist) could go a long way in tempering the growing feeling that innovation is dead at the company.
But frankly, the "innovation is dead" idea never made much sense to us. If we do a short timeline of Apple's game-changing products, we can see that the iPod was released in 2001. Incremental improvements were made, and products like iTunes, the iPod nano and iPod shuffle were released over that time period, but nothing else surfaced. Apple teamed up with Motorola for an iTunes-compatible phone called the Rokr, which was nothing short of a dud. There was a high-end speaker that was priced too high and never took off.
Then Apple hits it big with the iPhone, which was and still is the most important product in all of Apple's history. Its reputation for quality is unmatched, and we believe it's undeniable that each generation has been an improvement over the last. Apple then launched the iPad in 2010, a product that many thought would be a flop. Instead, it revolutionized computing and has led to the decline of the PC. During this time, the company also had a terrible social networking flop with Ping, and the iPad is now largely considered the "last" innovation of Steve Jobs, though he claimed the company had a robust pipeline prior to his passing.
The market fears another innovation will never come, but truly, the company went nearly 6 years without introducing a new product after the iPod. After the iPhone, Apple went 3 years without a new product, which was the iPad. Three years later, the firm hasn't introduced a new product, but it has revolutionized computing, continues selling millions of iPhones and iPads, and it has sneakily stolen market share and mind share in the PC market.
Essentially, a few years without introducing a revolutionary product isn't really a big deal, in our view. Apple has spent the greater part of a decade building an ecosystem to support its various hardware and software products. We don't claim to know what the next "big" product will be, but we believe it's a very good chance it comes from the minds of Apple (and an even better chance that many people will believe the product is done before using it and becoming infatuated).
The primary concern with Apple has little to do with product lines, the popularity of its products, or really any fundamental business concern. Rather, investors' confidence with CEO Tim Cook and CFO Peter Oppenheimer is understandably shaken as the company has done an absolutely horrendous job managing its capital. With a cash hoard of $137 billion, shareholders would appreciate anything - a higher dividend, a share buyback, or even an acquisition in the supply chain that may uncover significant synergies (bolstering margins). We think the company would be wise to initiate a huge buyback at this time, since its shares look incredibly inexpensive.
Unfortunately for shareholders, however, it may take a new product for Apple to regain its beauty-contest status because management has shown little interest in distributing its capital. Frankly, a board shake-up could be the best thing to happen to the company since it seemingly isn't composed of any prudent capital allocators. Cook points to frequent "discussions" about what to do with the cash hoard, but we think buying back shares is such an obvious choice that we can't believe the board's inaction.
Nevertheless, we believe Apple is an absolutely wonderful company with a bright future ahead of it. Some interest on the part of the board and management in allocating capital could relieve much of our primary concerns, but we think it may take a new product to calm those critical of the firm's product pipeline. We think shares look inexpensive at current levels, and we continue to hold them in the portfolio of our Best Ideas Newsletter.
Additional disclosure: AAPL is included in the portfolio of our Best Ideas Newsletter.