Forget Einhorn, Apple Needs To Lay Out Its Plan For Growth Markets

| About: Apple Inc. (AAPL)
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Apple (NASDAQ:AAPL) has agreed to pull one of its proposals from the shareholder meeting Wednesday after a federal judge ruled in favor of a bid by Greenlight Capital that sought to block voting on the same. The hedge fund, which has invested in Apple’s shares and is led by David Einhorn, wants the company to issue perpetual dividend-bearing preferred shares, or iPrefs, as a means to return more cash to shareholders and unlock value in its huge cash hoard. However, one of the three proposals that Apple had put up for shareholder voting required that shareholder approval be necessary to issue preferred stock in the future. This, if implemented, it would have eliminated the board’s leeway in the matter and made Einhorn’s proposal much more time consuming to implement. While the court ruling doesn’t imply that Apple will implement Einhorn’s preferred share proposal, it helped bring back some optimism in the stock, sending it back over $450 in trading Friday.

See our complete analysis for Apple stock here

CEO Tim Cook has said that Apple is looking for ways to use its cash for the benefit of shareholders and will consider Einhorn’s proposal. With a huge cash hoard of $137 billion and annual cash generation of almost $50 billion, there is a huge possibility that Apple will announce a bigger dividend or a stock buyback scheme in the future even if it doesn’t implement Einhorn’s proposal. While it would indeed serve as a near-term catalyst to the stock if Apple starts returning more cash to shareholders through whatever means it deems fit, we see the same as having little impact on the company fundamentally. Moreover, the cash allocation would be limited by the fact that Apple has a majority of its cash overseas, repatriating which would lead to tax concerns.

We maintain our $650 price estimate for Apple’s stock, about 45% ahead of the current market price.

Emerging market strategy required

How Apple could improve its fundamentals is by coming up with a better strategy for the emerging markets where the iPhone is way too overpriced to make any meaningful dent. Android smartphones are already breaking the price barriers at the low-end, infiltrating emerging markets such as China where Apple doesn’t yet have a deal with the largest carrier, China Mobile. Considering that 3G penetration in China is about 20% currently, despite which it has already overtaken the U.S. as the biggest smartphone market in the world, Apple will miss out on a huge growth opportunity if it doesn’t find a way to mitigate China Mobile’s subsidy concerns. We are however optimistic that such a deal will happen in the future and believe that this could be the next big catalyst for Apple’s stock. (see Apple’s China Potential Could Be Limited By A Subsidy Compromise With China Mobile and Apple Could Have A $750 Fair Value If China Mobile Deal Works Out)

In order to benefit more from the China potential, it may behoove Apple to consider a cheaper iPhone for the emerging markets that does not compromise much on the build quality and margins in a move similar to the iPad mini. This will also help lower the per phone subsidy costs and potentially help bring China Mobile on board. Such a move would also undoubtedly translate well to other developing markets that may want Apple’s iPhone but may find the subsidy costs and retail price tag too high. (see Apple Needs A Better Emerging Markets Strategy)


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