Apple (AAPL) is becoming synonymous with the can't miss prospect who has his game scrutinized and ripped apart by apparently well-meaning coaches, general managers, and fans, who are notorious for outthinking their own selves. Carl Icahn recently alluded to his recent move to purchase large blocks of Apple stock as a "no brainer." The billionaire investor also described Apple as his "most compelling" holding out of an investment portfolio that includes Federal-Mogul (FDML), Chesapeake Energy (CHK), and Netflix (NFLX). Going forward, Mr. Icahn has also outlined an ambitious share buy back plan that he feels will immediately ignite alpha appreciation in Apple stock.
Again, the Apple Revolution story feels eerily similar to that of Nike (NKE) and its historically leading pitchmen Michael Jordan, Kobe Bryant, and LeBron James. Nominal statistics, on paper, are not always the best measures of real performance. Many contrarians seem to offer devil's advocate arguments simply to revel in the smug haughtiness of appearing contrarian. At this junction in time, however, placing a short bet on Apple stock would be comparable to a kamikaze suicide mission. Apple contrarians attempting to be heroes may helplessly watch their positions go down in a towering inferno of flames.
The Mechanics of Shorting Apple Stock
A trader shorting Apple stock would first borrow shares from an investor and immediately sell out of that position for cash. At a later date, the short seller would re-enter the stock market to "buy to cover" Apple shares and re-pay the original stock loan. Short sellers therefore turn profits amid share price declines. Going short, of course, is always a risky proposition because share prices theoretically range between zero and infinity. A short squeeze occurs when short sellers frantically "buy to cover" appreciating stock to contain their own losses. Sophisticated bearish traders may also buy Apple put option contracts, which grant their holders rights to sell stock at a certain strike price. Puts, of course, become worthless if left to expire out-of-the-money, at a time when Apple shares were trading at higher levels than the option contract strike price.
Apple shorts have largely been routed recently. Still, Yahoo Finance reported that traders had sold 17.8 million shares of Apple stock short, as of October 31, 2013. Apple closed out its latest Q4 2013 reporting period, on September 28, 2013, with 899.2 million shares of common stock issued. Apple stock established its own record high at $705.07 per share, on September 21, 2012, which also calculated to a $659 billion market capitalization price tag on Apple. Apple, as the world's largest publicly traded corporation then carried a valuation that was $250 billion more than second-place ExxonMobil (XOM). In the ensuing months, Apple stock was to decline to a 52-week low at $385.10, on April 19, 2013. Apple stock was to rebound sharply from this nadir to close out the December 4, 2013 trading session at $565.00 per share.
Contrarians have delivered numerous talking points that they have rationalized to support a negative stance towards the stock. Apple bears have steadfastly argued in defense of the Law of Large numbers, which would curtail share price appreciation due to limited growth opportunities within saturated markets, by definition. More specifically, dedicated bears have cited the death of Steve Jobs, Android market share expansion, and the Microsoft-Nokia alliance, as deciding factors that will force the Apple Revolution towards inevitable product maturity and collapsing margins. Apple bears, however, are taking a misguided bet against King Cash. Again, an Apple short position may be comparable to a suicide mission.
Apple Cash is King
Apple closed out its latest fiscal year with $14.3 billion in cash, $26.3 billion in short-term marketable securities, and $106.2 billion in long-term marketable securities on the books. Apple actually increased cash flow generated from operations to $53.7 billion from $50.9 billion between 2012 and 2013. In all, Apple's September 28, 2013 balance sheet featured $146.8 billion in cash and investments above $83.5 billion in total liabilities. Apple liabilities did include $10.1 billion in deferred revenue, which will eventually fall off the balance sheet, after ultimately being recognized as sales on the income statement. Apple may then be left with roughly $60 billion in cash and investments, if it were to pay off all liabilities and taxes upon the repatriation of overseas assets. At current levels, one $565.00 share of Apple stock offers nearly $70.00 in net liquidity. Apple stock would trade for a modest twelve times current earnings, after backing this liquidity out of the current share price and dividing that amount by the $40.03 in 2013 earnings per share (($565 - $70)/($40) = 12.4 P/E Ratio).
On August 13, 2013, Carl Icahn, 77, took to Web 2.0 Twitter (TWTR) to Tweet that his investment vehicle had taken out a "large position" in Apple. Icahn Associates was to follow up this tweet with Securities and Exchange Commission Form 13F, which was filed on November 14, 2013. SEC Form 13F then confirmed that Icahn Associates held 3,875,063 shares of Apple stock, then valued at more than $1.8 billion. Icahn's October 24, 2013 letter addressed to CEO Tim [Cook] indicated that Icahn had upped the ante to 4,730,739 shares of Apple, with the intent of adding to this position. Carl Icahn then took the opportunity to propose an ambitious $150 billion Apple stock buy back plan out of management. Icahn set a $1,250 three-year price target on Apple stock, if the company were to follow through with his plan. On November 26, 2013, Time Magazine's "Master of The Universe" delivered a precatory proposal for Apple shareholders to vote on his latest project, without binding management to the agreement. Carl Icahn backed off his initial $150 billion request and is now calling for an additional $50 billion in Apple stock buybacks.
On April 30, 2013, Apple sold a then record $17 billion in corporate bonds, at rates that were between a mere 20 and 100 basis points above comparable Treasury securities. Bloomberg has already speculated that Apple structured the bond deal, in order to avoid paying taxes upon more than $100 billion in overseas reserves. Apple is likely to use the $17 billion in bond proceeds to help finance its stated goal of returning $55 billion to shareholders through the end of 2015. Apple has already bought back a net 16.8 million shares of outstanding stock, over the past three years. An immediate $10 billion buyback would lower the Apple count from 899.2 million to 881.5 million shares of common stock outstanding. This relatively minor buyback would add an automatic $2.00, or 5%, on top of the current $40.03 Apple earnings per share. Apple operates with more than enough capital to reward shareholders over the long haul.
The Bottom Line
Bearish catcalls foreboding the prompt demise of Apple sound a bit premature, at this junction in time. Apple bears may highlight deteriorating net income, profit margins, and market share figures to rationalize that this latest Revolution is coming to an abrupt end. Apple net income did decline from $41.7 billion to $37.0 billion, between fiscal years 2012 and 2013. Apple cost of sales (+21.4%) accelerated at a much faster rate relative to revenue (+9.2%), during this time frame. Year-over-year cash flow from operations, however, actually increased from $50.9 billion to $53.7 billion at Apple. Apple took $6.8 billion in depreciation and amortization charges through 2013. The difference between net income and cash flow from operations trends may be therefore related to tax planning strategies.
Apple bears often present market share data out of both comScore (SCOR) and International Data Corporation (OTC:IDAS) to warn that the Google (GOOG) Android platform is gaining popularity, at the expense of the iOS operating system. On August 5, 2013, IDC reported that Android was the leading tablet operating system, in terms of unit shipments, as it accounted for 62.6% of the Q2 2013 market. Last year, Apple iOS and Google Android operated 60.3% and 38% shares of tablet shipments, respectfully. Market share data, however, is somewhat misleading, due to the widely divergent business models of Apple and Google. Apple is a vertically integrated consumer electronics company, while Google is a search engine. As such, Android software is practically given away at cost, in order to drive traffic towards Search. The power of the Apple brand is above engaging in an all-out Price War, for the sole purpose of expanding market share. Apple return on equity remains above 30%.
Many Apple bears, of course, have failed to include the prospects for Cupertino striking a deal with China Mobile within their calculations. China Mobile brings a book of 700 million subscribers to the negotiating table. In closing, doggedly determined Apple shorts may soon learn the real meaning of the old cliché, "a fool and his money are soon parted."