On January 27, 2014, Apple (AAPL) reported its fiscal Q1 2014 results for the period ended December 28, 2013. Wall Street, of course, anticipated these financials with bated breath, as Apple's first quarter of 2014 largely overlapped with the critical Holiday Season. Apple closed out Q1 2014 having sold a record 51 million and 26 million iPhone and iPad units, respectively. In all, Apple banked $13.1 billion in net income off $57.6 billion in revenue. Wall Street traders, however, were clearly not pleased, as they unceremoniously dumped Apple stock from $547.22 to $503.49 for an immediate 8% loss upon the release of the report. Over the next two weeks, Apple stock was to collapse further to a multi-month low at $493.55, before rebounding sharply above $540 per share. A strong case may be made that CEO Tim Cook has established a $500 put - floor in Apple stock through his regime of aggressive buybacks.
$14 Billion in Apple Buybacks
On February 6, 2014, Tim Cook revealed to the Wall Street Journal that Apple had spent $14 billion of its cash hoard to buy back its own shares in the two weeks after reporting Q1 2014 results. Cook disclosed that $12 billion in stock was purchased as part of an accelerated buyback program directly from investment banks, while the remaining $2 billion balance was bought back through open market transactions. The recent $14 billion in buy backs, of course, was part of an ongoing plan to return $100 billion in capital back to Apple shareholders through buybacks and dividends by the end of 2015. Cook took advantage of the "surprise" correction in stock to get "aggressive" and back up the truck to buy back Apple stock. Again, Apple investors should now consider installing an effective $500 Tim Cook put within these shares.
The $14 billion buy back would have purchased an estimated 28 million shares, if executed at an average $500 stock price. Apple closed out its latest quarter having used 896.1 million shares outstanding to calculate $14.59 in earnings per share. Apple therefore bought back 3.12% of itself within two weeks, which would also calculate out to a revised $15.06 EPS for Q1 2014. In terms of ongoing dividends, a 10% increase would offer shareholders a $3.36 quarterly payout beginning in May 2013. The buyback did spare Apple roughly $100 million in dividend payouts over the course of next year. $100 million as a starting point for ongoing cash flow, if capitalized at 7%, is actually worth $1.4 billion in today's dollars. According to Wall Street valuations, Apple has allocated $14 billion to help create an immediate and rough $23 billion in shareholder value off market lows. By most measures, the $500 put money was well spent.
Billionaire activist investor Carl Icahn (IEP) has also backed off his very own aggressive buyback proposals, as somewhat of an adjunct to the $14 billion series of Apple transactions. Icahn, who described his recent move to purchase billions of dollars of Apple stock as a "no brainer," had been pressuring Cupertino to up the ante by $50 billion and spend $150 billion in total to buy back stock. On February 10, 2014, the oft cantankerous Icahn cited Apple's recent and aggressive buybacks as rationale for him to abandon his own proposal that was up for non-binding shareholder vote. Jennifer Ablan and Reuters have suggested that powerful institutional investors, such as the California Public Employees' Retirement System, would prefer that Apple reinvest the lion's share of capital back into the business to finance growth, instead of simply paying out dividends as a literal regional utility.
Growth Concerns Are Overblown
iPhone Unit Sales
iPhone Revenue Per Unit Sold
iPhone % of Apple Revenue
The stock market, of course, functions as a pricing mechanism that discounts future growth, rather than simply pricing out a snapshot of the balance sheet in real time. The recent Apple selloff was juxtaposed against broader weakness in the S&P 500 and Nasdaq indices due to global slowdown concerns. During its latest earnings call, Apple forecast sales of between $42 billion and $44 billion for its next Q2 2014. Last year, for Q2 2013, Apple took down $9.5 billion in net income off $43.6 billion in quarterly revenue. Wall Street has erroneously likened flat revenue projections to a profit warning at Apple. Apple bears, such as Andy Hargreaves of Pacific Crest Securities, have been quick to pounce on the news as evidence that Tim Cook's signature 2013 China Mobile deal will fail to generate real growth. Alex Gauna of JMP Securities summed up his disappointment accordingly:
"After showing modest signs of improvement, we're back to a no-growth outlook. It's something Apple needs to find an answer to - if it can't prove that it's going to be a growth story again, the valuation is too high."
Certainly, Apple analysts are well familiar with the fact that the iPad and iPhone platforms have combined to generate more than 70% of company revenue for the past several quarters. In terms of geography, Greater China may still emerge as Apple's most consistent growth driver going forward. Peter Oppenheimer, CFO, has highlighted a strengthening dollar as the main culprit behind flat revenue projections, rather than any weakening of demand.
Apple iPhone revenue per unit has also remained well above $600, which does suggest that the brand preserved its appeal and pricing power over the years. As such, many of the hysterical catcalls that initially wrote off the 5c as a flop have actually been rebuked. Prospective Apple investors may also write off market share research out of comScore (SCOR) and International Data Corporation (IDC) as pure malarkey. Google (GOOG) practically gives its Android smartphone and tablet operating system away, in order to drive traffic towards its higher margin Search business. Apple has largely remained above the fray, in terms of largely avoiding any real price wars with likes of Google, Amazon (AMZN), BlackBerry (BBRY), and Microsoft (MSFT).
In terms of profitability, recent IHS iSuppli teardowns suggest that Apple has been leveraging its immense buying power to slash costs for iPad and iPhone shared component parts. IHS iSuppli estimates a mere $218.30 in bill of materials and manufacturing costs for the premium 64GB iPhone 5s, which currently retails for $849. Offhand revenue projections are, of course, but one small piece of the growth puzzle.
The Bottom Line
Apple closed out its Q1 2014 with $158.8 billion in cash and investments above $95.5 billion in liabilities on the books. Again, Tim Cook has already admitted to spending $14 billion in cash to buy back Apple stock. The accelerated plan may have purchased an estimated 28 million shares at an average price of $500. The series of buy back transactions would have left Apple with at least $144.8 billion in cash and securities and 868.1 million shares of outstanding common stock on the balance sheet. Be advised that Apple liabilities did also include $11.4 billion in deferred revenue, which will ultimately be recognized as revenue and income upon the income statement. Apple would then be left with at least $60.7 billion in cash and securities, if it were to immediately pay off all liabilities. This haul breaks down further to $70 per share in liquidity, when divided amongst 868.1 million shares of common stock outstanding.
Apple shares were to finally change hands at $544.43 at the February 13, 2014 closing bell. Minus the $70 liquidity, Wall Street has roughly priced out the Apple business model at $475 per share. Apple is trading for a mere eleven times current earnings, after backing out cash, investments, and all liabilities. At these levels, growth is but a minor concern. In effect, Apple can simply spend its substantial cash horde to purchase stock and generate alpha shareholder returns. Real growth would therefore represent the cherry on top, or perhaps the vanilla ice cream on top of the Apple pie, in this case. Again, buying into Apple is a "no brainer".
Going forward, Apple investors should remain mindful of the Tim Cook put at $500. Any retest of the $500 lows would present yet another opportunity to back up the truck and the Apple cart alongside Tim Cook and Carl Icahn to purchase stock.