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Varun Gupta
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Graduated from University of Michigan with degree in Economics and Financial Mathematics.
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  • Did Apple Just Execute The Largest Share Buyback In A Quarter..ever?

    Every two weeks, Nasdaq releases Short Interest figures on equities. This article is meant to explain some curious movements in the short interest numbers for Apple (NASDAQ:AAPL) over the past quarter.

    Apple's Short Interest Spike

    DateStock PriceShort Interest
    4/19 (intraperiod low)385.10 

    - Short interest increase: 21,514,679

    From 4/15 to 4/30, the number of shares held short in Apple doubled to over 40 million ($8 billion). During the same period, the stock price dipped to a 52-week low of 385 before rebounding to 442. While some of the rise in short interest can be explained by expectations that Apple would revisit its 52-week low, there is a better explanation that has to do with how Apple repurchases shares.

    Accelerated Share Repurchases

    When Apple announced it's share repurchase program last quarter, Tim Cook said they would be doing accelerated share repurchases instead of the alternative option of open market buybacks.

    A little background on accelerated repurchases:

    "The accelerated share repurchase (NYSE:ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company. The shares are returned to the client through purchases in the open market, often purchased over a period that can range from one day to several months. "

    - Investopedia

    With accelerated share repurchases, since the investment bank is selling the company shares that it doesn't own, the investment bank is left with a large short interest to unwind. The company repurchasing shares also pays a premium to the market price in return for having the investment bank deal with the problem of how to best time buying back those shares on the open market.

    A Theory on What Happened

    When the Apple's Board of Directors approved the largest share buyback program in history, they also set guidelines/triggers around how much would be purchased and when. With the stock price depressed, it makes more sense to set guidelines to allow higher volume buybacks at lower prices rather than an amount per quarter.

    It would make a lot of sense for one of those triggers to be around $400. A 1% premium paid to the investment bank would mean share repurchases when the stock price hits $396. The investment bank knows that massive purchases will move the market, so it waits for another 1-2% drop before it starts short covering by buying back shares.

    This would explain the dramatic increase in short interest as a massive share buyback by Apple combined with investment banks waiting too long to unwind their short positions.

    Confirmation from the Second Bottom

    DateStock PriceShort Interest
    6/28 (intraperiod low)388.87 

    - Short interest increase: 4,348,447

    Apple's stock dip below 400 at the end of June, has given me another data point to test my hypothesis. Even though there was only an increase of 4 million (1.6 billion), 27 million is still the second highest short interest number reported. There is also a chance that there was some short covering on the way down from 430 to 390 before Apple would have done a buyback.

    Estimating Share Repurchases

    Change in Short Interest = Share buyback - Investment Bank short covering + Increase in Institutional Short Interest

    For the first dip, a 25 million share buyback with 10 million in Investment Bank short covering, and 5 million increase in institutional short interest would get us to the 20 million in short interest difference.

    For the second dip, a 15 million share buyback with 8 million in immediate Investment bank short covering and 3 million decrease in institutional short interest would get us to the 4 million in short interest difference.

    This give us an estimate of 40 million for the number of shares repurchased for the quarter or $16 billion worth. At a market cap of $400 billion, this represents roughly 4% of the company. As these are rough estimates, I'd estimate that the total share buyback be in a range of $12 billion - $18 billion.

    Investment Thoughts

    While investor sentiment is that Apple is a great long term buy, in the shorter term Apple has been trading in ranges because investors are waiting for the next product cycle to breathe life back into the stock. A large share buyback will help keep the earnings per share up for this quarter even with lower revenues. More importantly, this would lead to an upward revision of earnings per share growth as Apple releases new products in the fall and through 2014.

    Investors trying to time the market and buy Apple after weaker earnings may find themselves left out of the rally they have been waiting for. I'd recommend long term investors to hedge their bets by taking a position in Apple before they announce earnings and then use any dips to add to that position.

    Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: AAPL, earnings
    Jul 15 2:49 PM | Link | Comment!
  • Coinstar: The Perfect Acquisition Target For Groupon?

    I can almost see the press release.

    Bringing great value to customers; Groupon acquires Coinstar.

    With Groupon's (NASDAQ:GRPN) recent stock rally, Groupon should be looking at potential acquisitions that would help Groupon distribue deals.

    Coinstar generates more than 80% of it's revenue from Redbox DVD rental kiosks. While most people see Coinstar as a good cash flow company in a dying market; Groupon should see Redbox as a fantastic growth opportunity.

    Coinstar would fit in well with Groupon. Kiosks and collective buying are both innovative ways of bringing discounts to customers. Both strategies work on the principle that high volume sales allow for consumer savings. An acquisition would provide great synergies in branding and advertising and instantly give Groupon a physical presence nationwide.

    Strategic benefits for Groupon:

    1) Nationwide Advertising Presence

    - There are more Redbox machines in the US than Mcdonalds and Starbucks.... combined (35,000+ Redbox kiosks)(link)

    A good deal is hard to pass up, unless you didn't know it existed in the first place. Groupon needs to be aggressively exploring ways of putting deals in front of as many eyes as possible.

    Redbox would provide Groupon a customer base with great advertising potential. Redbox has succesfully grown a base of returning value oriented customers. These are the same type of people that would be enticed into buying Groupon's deals.

    Redbox machines are already located in areas to maximize foot traffic and logistically would be easy to remotely update and monitor deals via internet connection.

    2) Advertising....with instant sales

    - In 2013 Q1, Redbox had 40 million unique credit cards (link)

    - 17+ million smartphone customers, 4+ million mobile subscribers, 5+ million social media fans (link)

    Redbox just happens to have the very three pieces of data that Groupon needs from customers: location, credit cards, and e-mail.

    The best part about advertising on Redbox machines is the chance to sell to someone already in the process of making a purchase. A simple screen before checkout could allow customers to add Groupons with 1-click. A lot better than the 5-10 clicks it takes to open apps, get to Groupon app, click a deal, confirm purchase..etc.

    Coinstar is already starting to explore the potential of Redbox machines as a point of sales for local event ticketing.

    "With the introduction of Redbox Tickets, we see Redbox becoming a new point of discovery for local events and attractions - a win for consumers, venues, inventory owners, Redbox and Redbox retail partners,"

    - Mark Achler, senior vice president of new business, innovation and strategy, Redbox.

    Sounds pretty similar to how Groupon views themselves as point of discovery for local merchants and businesses.

    They might even want to lower DVD costs to draw in customers and sell them the more profitable Groupon deals. Or why not have a Groupon for DVD rentals, $20 for 2 rentals/month for a year. Or to Groupon that means 12-24 more chances to sell deals.

    3) Brand Development

    - 355 million people see Redbox machines every week (355 million impressions per week)(link)

    The final step for Groupon in unlocking value from Redbox would be getting people to think of Groupon every time they see the machines. Three hundred million people a week seeing a Groupon logo would be more valuable for Groupon than the sales potential from Redbox.

    This could be as simple as adding stickers of the Groupon logo to Redbox machines that gets updated to show deals. Or, it could go so far as to completely rebrand Redbox. Imagine 300 million people a week seeing the Groupon logo on a green kiosk. It could be called Groupbox to help build Groupon(line) as a value brand.

    Addressing the Elephant in the Room - the Decline of DVDs

    Coinstar is being undervalued based on the foreseeable decline of DVDs. It's hard to argue that DVDs will eventually be phased out as technology advances. However, the impact on Coinstar's business is overly pessimistic. DVD sales will be far more impacted then DVD rentals.

    Streaming movies sales are already priced similarly to DVDs, in the $10-15 range (Amazon DVD vs Streaming) and streaming movies can't break on you. Streaming rentals, on the other hand, are currently priced at $3-5/day compared to the $1.25 for renting DVDs through Redbox. Even if prices came down, the blockbuster hits Redbox focuses on would be priced at the higher end online.

    I feel that as long as Redbox can keep it's better value, people won't throw away their DVD players. And the move towards a secondary revenue source on Redbox machines would allow for future discounts to preserve that value proposition.

    At the very least Redbox give the company enough time to test other kiosk concepts and/or wait for better technologies. While DVDs will eventually decline,

    Acquisition or Partnership - A deal for Groupon

    The question Groupon should be asking is which makes more sense, a partnership or an acquisition. A simple revenue sharing partnership would be both low-costing to implement and potentially profitable for both companies. But if Groupon really wants to be the leader in local sales, now would be the best time to buy Coinstar, while it's being undervalued by the market. There are a couple potential catalysts that could send Coinstar shares soaring.

    In Conclusion

    I believe that Coinstar is a good stock for investors because it has high upside potential and low downside. Coinstar is undervalued at $60 because the market isn't pricing in the full advertising and sales potential of Redbox. Groupon's business and goals make it the best partner to realize that potential, but either way investors will be rewarded once Coinstar figures out additional monetization methods for Redbox.

    In fact, if Groupon is to slow, Livingsocial could acquire Redbox for many of the same reasons. I just think the visibility of Redbox would be more valuable reinforcing Groupon's already established brand and leader status.

    A Groupon acquisition of Coinstar would go a long way towards expanding customer reach and building Groupon as a value brand. It's short-sighted (no pun intended) to look at Coinstar as a DVD rental company, when they are an Automated Retail Solutions company that just happens to sell DVDs.

    After all, doesn't it make sense that we'd see a 3D printing kiosk before a home 3D printer? And who else would General Electric (NYSE:GE) or 3D Systems (NYSE:DDD) partner with to develop and distribute their technology?

    Disclosure: I am long CSTR.

    Jun 21 5:12 PM | Link | Comment!
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    Feb 14, 2013
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