With the stock price plummeting to 52-week lows, Apple (NASDAQ:AAPL) should immediately unleash a massive buyback plan. A plan with the size and scope that it materially reduces the shares outstanding and provides support for the stock.
Clearly signs exist that the company has exited the massive growth phase of the last decade with a load of competitors constantly attempting to undercut the price and performance of its smartphone and tablet products. Apple though isn't entering a feared phase of flat stock performance similar to the often compared decade of disappear at Microsoft (NASDAQ:MSFT). Investors continue to miss the drastic difference between the valuation prospects of both stocks at those starting points.
As highlighted a month ago (see Apple s Cash Balances Approaching $150B), Apple needs to adopt a material plan to absorb the constant cash inflows. The recent success of the buyback program of Yahoo! (NASDAQ:YHOO) should energize a market that typically frowns on buybacks.
High PE Of Microsoft
Microsoft began the decade of despair with a significantly higher PE. As the below chart shows, it had a trailing PE in the 40s and 50s to start the weak period. Ironically it wasn't until the PE ratio hit right at 10 that the stock bottomed out. Since that point, Microsoft has been a great investment having risen from $10 to $40 on several occasions.
Ironically, Apple is already below those PE levels even as investors now forecast a terrible decade for the stock. If Apple had peaked with a PE in the 30 or 40 range, investors would be correct to be skeptical that the stock would budge for a long time. Not only is the trailing PE currently at the lowest levels seen by Microsoft, but Apple now trades at a significant discount to Microsoft.
Yahoo has already provided the blueprint that Apple should follow. Yahoo built up significant cash balances and utilized those amounts to initiate a massive buyback plan. In the last year, the company has reduced the outstanding shares by 9.6% with plans for another 2-3% in the near term. The stock stabilized with the initial repurchases in Q112 followed by significant gains when the plan was ratcheted up to $1.45B in Q212. See the slide below from the Yahoo earnings presentation:
While other factors have contributed to the surging stock price such as the Asian assets, Yahoo has yet to produce any significant gains in the operating results (see Limited Progress At Yahoo). Not to mention, the valuation of the Asian assets were always identified, but the significant change in the stock price occurred when Yahoo finally utilized those assets to benefit shareholders. The market tends to place limited value on non-producing assets such as equity interests and cash balances.
With the daily cash machine of Apple, it has become a mystery that the company hasn't already initiated a more aggressive plan. The company generated over $56B in cash last year and will easily top that amount with even limited revenue growth this year. Even with only $10B in cash generated on a quarterly basis, the company could reduce the shares outstanding by nearly 10% only using the ongoing cash machine.
When the company reports Q113 earnings on April 23rd, Apple will likely report an cash balance of around $150B. An amount so large that it requires a small army to manage.
With cash approaching the $150B mark and the stock plunging, the BOD has no alternative but to unleash a massive buyback program. The enterprise value has now shrunk to only $230B making Apple similarly valued to Microsoft and Google (NASDAQ:GOOG). With the myth of a decade of despair ahead similar to that of Microsoft, Apple conversely should see a decade of solid stock gains if only the company would follow the Yahoo buyback plan. Once Yahoo unleashed a significant buybacks during Q412, the stock soared. The same would happen for Apple if only the BOD would act.
Even if the BOD doesn't act, investors can buy the stock knowing its cheap with the potential for huge gains if a move is ever made.
Disclosure: I am long AAPL. 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.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.