It's tough to stay at the top, and Apple (NASDAQ:AAPL) has been finding that out the hard way. Lately, I've been seeing a lot of unfounded criticisms thrown at the company. As we're seeing overall market sentiment turn slightly against Apple, we as investors are presented with a unique situation. This period has provided an excellent opportunity to buy shares for cheap while many investors are bearishly fearful of Apple's future. The stock market runs on fear and greed, and, as Warren Buffett says, "be greedy when others are fearful."
I really don't think it will be much longer before the market wakes up and realizes that Apple is still just as relevant and valuable as it was 8 months ago. Since earnings, Apple has trekked up around 10-15% while investors wait for the company to release the next big thing. Investors are hungry for new products and that's understandable, but many who are bashing Apple because of its share repurchase and debt issuance are flat out wrong. This article is my attempt to refute two of the most atrocious criticisms I have seen to date.
#1: The Share Buyback Plan Means That Apple Is Out Of Ideas
I've seen this one in too many places across the internet. From anonymous message board posts to full length blogs (this one for example). The flawed logic follows the idea that Apple is returning money to the shareholders in a last ditch effort to stave off angry and impatient investors. But there's more to it than just appeasing shareholders, because apparently Apple is reverting to buybacks and dividends because the company is out of ideas. I have a feeling that the same people who believe Apple is out of ideas are the same people who took a look at the cell phone in its infancy (see below) and thought it would never catch on.
Or perhaps the people perpetuating this theory are Steve Wozniak's old bosses at Hewlett-Packard (NYSE:HPQ), who famously rejected his pitch for the personal computer that he built while he was an HP employee. We all know how that ended up, don't we? Wozniak partnered with Steve Jobs to create the company that now has a market cap that is 10 times larger than that of Hewlett-Packard.
Or better yet, maybe it's coming from the same people who didn't think that Amazon's Kindle could replace a good old fashioned hardcover. Anyone want to open up a Barnes & Noble franchise? The fact is, Apple is an innovator and an idea machine. As you read this, Apple engineers are dreaming up new things and tinkering on projects that the rest of us couldn't even fathom until our teenaged children ask for them as Christmas presents.
The point I'm trying to make here is that closed-minded people never understand, or anticipate, the way that techies work. Quite frankly, I don't think that the engineers and designers at Apple really care about what any of the outside world thinks; they're too busy doing what they're good at. So while investors are pretty good at worrying, those guys and gals at Apple are putting the finishing touches on the iWatch (more on that later). As CEO Tim Cook said in the most recent earnings report conference call,
The decline in Apple's stock price over the last couple of quarters has been very frustrating to all of us. But Apple remains very strong and we will continue to do what we do best. We can't control items such as exchange rates and world economies and even certain cost pressures, but the most important objective for Apple will always be creating innovative products and that is directly within our control.
Yeah, I like the sound of that. Too many managers in this day and age are focused on maximizing shareholder value, and achieve this by mortgaging the long term success of a company to produce stronger earnings in the current quarter. The share buyback program might be Apple's way of throwing a bone to the hungry investors who are wondering what happened to the value of their shares, but it doesn't tell us anything other than the fact that Apple has a huge pile of cash laying around and has decided to give some back to the investors. If someone is trying to convince you that Apple is out of ideas then you need to turn around and run from them as fast as you can. Because at the end of the day, if they have nothing else, Apple will have ideas.
Like the iWatch.
The iWatch was originally believed to be scheduled for release in Q3 or Q4 2013, but many are now predicting Q1 2014. Any speculation on what the exact specifications of the iWatch are and/or how many units will be sold would purely be based on guesses of past sales, so I will avoid making any estimations or revenue projections for it. What the iWatch does tell us is that Apple has a new product that is in the last few stages of development, and that is what matters to product hungry investors who want to see something new.
#2: Steve Jobs Wouldn't Have Issued Debt
This is a common one that is really just a spawn of the general criticism that Tim Cook isn't as good of a CEO as Steve Jobs. No kidding. Steve Jobs was a once-in-a-generation business leader. He was the perfect balance of being both cool and nerdy, and he spoke to people in a way that everyone could understand. Tim Cook, or any other Steve Jobs successor for that matter, has huge shoes to fill. Every action he takes is talked about in regards to what Steve Jobs would have done, and whether he would be doing things differently had he not passed. Which leads us to our next point: that Steve Jobs would have vehemently opposed issuing debt, because he didn't want Apple to be put in a position of having these types of liabilities. In my opinion, saying that Steve Jobs wouldn't have issued debt doesn't say as much about Tim Cook as it does about Steve Jobs. Jobs could be viewed as a dinosaur when it comes to corporate finance. Sure, he wanted Apple to be self-reliant, but Apple is in a unique position now that is different than when Jobs was running the show. Tim Cook's Apple pays a dividend and does share buybacks, and that makes Apple shares more investor-friendly. To be clear: issuing debt was the right thing for Apple to do. Period.
Those bonds are saving Apple $9.2 billion in taxes on its $55 billion share buyback plan, and according to Gerald Granovsky, a senior vice president at Moody's, "from a pure corporate-finance theory perspective, this was a no-brainer." Perhaps some might question the ethics of skipping out on paying taxes, and this is obviously a fair criticism to make. While Apple should pay its fair share, the money that is in question has already been taxed in the foreign countries in which the money was made (albeit at lower rates than those of the USA). Since the money came from foreign consumers in foreign countries, Apple has no so-called "responsibility" to bring it back to the USA to get taxed once more by Uncle Sam.
Apple (along with several other corporations that do lots of business overseas) has spent millions of dollars lobbying the US government to allow for a period of limited tax on money being repatriated back to the states from abroad. So far, no dice. The government is wary of repatriation holidays ever since the one they opened in 2004, because the 15 companies that repatriated the most money ended up cutting a net total of about 20,000 jobs. This debt issuance is one way for them to meet that goal without having to throw money towards Washington politicians with the hope of some quid pro quo benefits.
Again, issuing debt was the right thing for Apple to do. It has received immense interest from investors who are eager to scoop up these bonds, and it provides additional billions of dollars in savings.
The Bottom Line
Apple is not out of ideas, and never will be. With that said, the share repurchase is nothing but a way to satisfy anxious investors and add value to Apple shares. In no way does it mean that Apple is desperate or resorting to "last measures" to prop up its share price.
Also, the debt issuance wasn't counter to the ideals of Apple. The company made a strategically brilliant move to finance its share repurchase plan at minimal cost.
I am bullish on Apple. The company may be in a phase where it isn't rocking the world with new products, but they have shown that they are still selling a ton of iPads and iPhones, and its Macbooks are resisting the overall decline in PC sales (refer to most recent earnings report). I am eyeing the release of the iWatch as a potentially huge catalyst for the value of this company. If it's a success, I think we'll see a large number of investors both large and small jumping back on Apple's bandwagon.
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.