By Jake Mann
Known as a rock star David Einhorn is one of the hedge fund industry's few managers that can truly move the market. Whether it was his high profile short thesis on Chipotle (CMG) last year, his bearish call on Green Mountain Coffee (GMCR) in 2011, or his St. Joe (JOE) escapade one year before that, it seems like the manager of Greenlight Capital always has a meteoric effect on whatever stock is in his sights.
Holding steady in Apple. It's not fair to think of Einhorn exclusively as a short-seller. His long-term Apple (AAPL) stake, for example, has received extra coverage in 2013 for his push for more value creation at Cupertino (read Einhorn's letter to Apple shareholders).
Although he hasn't gotten exactly what he wanted - Einhorn originally pushed for a type of preferred stock he called "iPrefs" - Apple did announce a dividend boost earlier this year. An expansion of its share buyback program to a total of $60 billion has also gotten some bulls clamoring, and Carl Icahn's recent move into Apple stock has only helped the situation. Now, while we can debate Icahn's push for an even larger buyback, there's no denying that Apple has the cash. We broke down the company's cash network here on Seeking Alpha earlier this summer in case you forgot.
The crux of Apple's present situation, though, relies on a few different potential catalysts. Gene Munster has talked about Apple investors' need for a carrot, so to speak, to show a renewed faith in the company's stock price. Other analysts have noted this as well, and in most years, this bait is a new product offering.
Obviously, announcement of a iPhone 5S or a next-gen iPad would be met with cheers from shareholders, but a few other ways of driving Apple upwards include: (1) a deal with China Mobile to offer an iteration of the iPhone to the carrier's 740 million subscribers, (2) a truly game-breaking device, such as an Apple TV, and (3) an acquisition to fill a pressing need, such Netflix (NFLX) for mobile content delivery, or Yelp (YELP) for mobile social networking.
While it's difficult to know which, if any, of these scenarios David Einhorn is personally cheering on, it's hard to argue that at least one would be a nice compliment to the next iterations of Apple's standard line of devices. A deal with China Mobile has seemingly been in the works for over a year now, but the word on the street is that both sides are hung up on what percentage of iTunes revenue is shared.
Furthermore, Apple permabulls have been pushing the Apple TV hype since last fall. While we have no details yet, one can't deny the earnings potential such a product would bring. One analyst projects that a domestic Apple TV launch could make the company $13 billion over the short-run if it chose a U.S.-exclusive launch. This estimate quadruples if the device is rolled out on a global scale.
Regarding our third scenario, you'd have to be living under a rock to miss Jim Cramer's constant calls for an Apple acquisition. Earlier this month, the Mad Money host said that Apple should buy Yelp for $75 a share, and back in March, he expressed hope that Apple would buy Netflix. Needless to say, neither of these scenarios have happened yet, but a cash balance of over $140 billion means Apple won't be getting away from the M&A rumors any time soon.
Now, with all of this under our belt, it's clear that Einhorn's decision to hold steady in Apple is a rational one. The potential is there to push Apple back to the vaunted $700 mark, and it's very possible that one of the aforementioned scenarios will come to fruition to push more bulls into the stock.
Goodbye, Microsoft. David Einhorn and Greenlight Capital do not, however, feel the same way about Microsoft (MSFT). We could discuss the tech giant's disappointing Surface and Windows 8 releases over the past year, or calls for Bill Gates to retake Microsoft's CEO role back from Steve Ballmer, but Einhorn himself summed up his bearishness quite nicely in its Q2 2013 shareholder letter.
In the letter, Greenlight was frank in its assessment of Microsoft:
"In 2006 we compared Microsoft to A-Rod, which was a compliment at the time. In 2013, the comparison is still apt, but it is no longer a compliment. Windows 8 appears to be a flop, and a decade of mismanagement has put Microsoft at risk of becoming a shrinking company. We were pleased when an activist gave the stock a boost, giving us the opportunity to exit with an annualized high single-digit return that slightly outpaced the market during our lengthy holding period."
Of course, that "activist" was Jeffrey Ubben's ValueAct Capital. In layman's terms, it's widely thought that ValueAct's goal is for Microsoft to focus its organizational efforts on cloud computing with its Azure platform. That's not exactly what Steve Ballmer has in mind, however, as his recent restructuring plan so plainly stated earlier this summer. Ballmer directly mentioned a future of "multiple devices and services," which flies in the face of any cloud-centric model.
Unless Microsoft can look itself in the mirror and realize that cloud is its best chance at ruling the future, Einhorn and Greenlight's decision to drop the company probably won't come back to bite them.
Final thoughts. Einhorn appears to have picked Apple over Microsoft because of the plethora of growth drivers at Apple's disposal. Microsoft, meanwhile, looks to have one saving grace, but its management isn't going down that road. Once you think about these two companies from this standpoint, it becomes quite clear that mimicking Einhorn in this regard will make for a very smart decision moving forward.