Apple's Money Back: A Desperate Act?

Mar.19.13 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) is rumored to be considering returning some of its massive cash holding to shareholders, with activist investor, David Einhorn being in the front line of investors criticizing the company following his recent lawsuit. Apple is currently holding $137 billion in idle cash, of which, investors and analysts have expressed different opinions regarding various options on how to use it. Tim Cook was quick to dismiss Einhorn's actions terming them as "silly sideshow," as noted by CNBC. Nonetheless, the probability of returning some cash to shareholders still remains high; actually to some, it is just a matter of an official confirmation.

The implications of returning money to shareholders

Apple has long been known to invest in research and development, and this indeed does involve cash, and a lot of it. The prospect of returning a sizeable amount of cash to shareholders, in what many see as a reaction to the pressure on the company's stock could easily be labeled "a desperate act." A common phrase says, "Desperate times call for desperate measures," so, is Apple trying to endure some desperate times by returning money to shareholders? And should it be desperate?

The company has lost billions in value over the last five and a half months. When Apple launched iPhone 5, there was great promise, which propelled the stock to an all-time high of $705, a situation that triggered robust analyst price targets on the stock, with some believing that $1000 per share was within reach. Nonetheless, that price now seems more like a pipedream for it to happen any time soon. Apple has lost approximately $245 billion in value since hitting $705 in late September. Investors have consistently shown a negative sentiment toward the stock, thereby inflicting further damage to recovery.

Giving back cash could act as a consolation to shareholders for the heavy beating the stock has received over the last five months. Can this restore some confidence? Well a famous saying states that if you give a man a fish, you feed him for a day. So, it would be interesting to see how much fish Apple would be giving to shareholders towards this course. Nevertheless, while the act of giving back to shareholders might seem like it would be taken out of desperation, the net effect might yet pay dividends; and of course that is assuming the company gives an amount unlikely to hurt its future investment plans.

This might give some investors a reason to hold on to the stock despite the plunge, thereby triggering some renaissance of the sorts for the stock price. That is if the forces of demand and supply continue to hold. Momentum traders could soon jump in on bullish prospects, which should further see the stock continue its recovery.

There is nothing wrong with the company's fundamentals, as it remains one of the cheapest stocks in the technology industry, as far as valuation is concerned. Many analysts would share the same thought on Apple's value. It is indeed the momentum traders that have contributed to its woeful plunge in recent months, which was triggered by supply constraints early in CQ4, 2012. This is why the company needs another trigger to mount a recovery campaign, and I believe returning cash to shareholders would be an ace for a play.

Apple's business environment is becoming increasingly competitive, almost on a fortnight basis, as the companies reveal monthly smart devices sales, with Samsung pushing it all the way in the smartphones market. Google (NASDAQ:GOOG) is advancing vigorously on the O.S platform, as Android continues to grow its market share. Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) are also battling out in the tablets arena, a market widely dominated by Apple's iPads. Additionally, there are lawsuits on patent infringements going on in courts almost on a monthly basis, as innovation becomes a key player in this unending battle.

The Bottom Line

Holding $137 billion in cash seems to irk some investors as the company's stock struggles to build up some momentum on recovery. However, had the company reinvested that money, the loss to date in terms of company value could be approaching $300 billion, assuming the same rate of loss in value is applied, that is, about 37%. Therefore, this has been yet another nice play by Apple given it has somehow saved some $50 billion from a potential burnout in the midst of a declining stock price.

Going by the assumption that Apple would announce the issuance of cash back to shareholders, I perceive a turning point, which could this time around prove sustainable. The good news is that this would be coming at a time when Apple is expected to announce new versions of its devices, including a rumored cheaper iPhone to address the low end market. Apple is currently trading at about $444, and although some analysts have already lowered their price target to about $400, or below, I still believe that it's not too late to buy. There is no reason why the company shouldn't hit $600 by the end of 2013, a figure predicted by several analysts.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.