http://www.shareholderssquaretable.com/sale-apple-shares-at-half-price/
Once again, activist shareholder/investor Carl Icahn, has sent an open letter to Apple CEO Tim Cook; asking once again for the company to consider accelerating their share repurchase program. As in the past (August 14, 2013) when Icahn disclosed that he took a large position in the company, he states the rationale is because the company’s stock price is severely undervalued.
Icahn noted in his open letter:
While we recognize and applaud the company’s previously increased share repurchase authorization, we ask you to consider our advice once again (to the benefit of all shareholders) and consider accelerating share repurchases again via a tender offer. Our valuation analysis tells us that Apple should trade at $203 per share today, and we believe the disconnect between that price and today’s price reflects an undervaluation anomaly that will soon disappear.
Once again (in the interest of full disclosure and transparency), I’ve been long AAPL since 1997. The disclaimer tab at the top has always contained this information.
Personally for myself as a shareholder, while I appreciate Icahn’s “lobbying” for other shareholders, I can’t help but feel these open letters also have an air of self-interest included in them. That is more so apparent in this one when they include a “valuation analysis” with an actual share price ($203) attached to it.
Now I’ve posted before about my own thoughts regarding how undervalued the company stock has been. At the same time though, other factors are at play. In the past, it was issues with Steve Jobs health that weighed on the stock. In 2013, it was a continuous chorus of Apple no longer innovating that weighed on the stock (as well as slower year-over-year revenue growth in iPhone and iPad sales). This all despite record revenues and profits. It’s how it has always been with this stock though when compared to how its peers used to perform back during the tech sector boom (which was also before Jobs returned to company after the NeXT purchase).
Pre-7-for-1 split when AAPL hit its then, all time high of $700 per share in late 2012, there was much speculation as to when the company would hit $1,000 per share/being the first US company with a trillion dollar market cap. And I opined about this back in 2012.… My opinion remains the same with Icahn’s open letter.
At his $203 fair market valuation, that would be Apple with a market capitalization again double of what it currently is (which is around $600 billion); in other words, slightly over a trillion dollar market cap (the buybacks will of course reduce the number of shares outstanding, thus reducing Apple’s market cap a bit as compared if the stock just doubled from here without any share repurchase).
The questions I brought up previously still apply though. Can Apple’s revenue growth continue at the pace expected for a company to maintain a $1 trillion+ market cap? A lot of that growth depends on many of those external factors I mentioned in several markets. Since that time, the 4K resolution proposition I mentioned is not even near the ubiquitous level. But mobile LTE chipsets now support radios with a wide range of channel frequencies which has allowed Apple to move away from smart devices that need to be manufactured for specific telecoms. This means less supply chain issues as well as a lower number of SKU’s with inventory.
Wall Street values Apple differently though; the expectation is continuous growth via a stream of new products; Apple’s record revenues and profits doesn’t mean jack to Wall Street valuation models though since Apple is running into that law of large numbers when it comes to year over year growth. This is in contrast to a company like Amazon that has a 800+ price to earnings ratio (which is down from the 3500+ it was at from 2012-2013), but promises eventual huge returns based on their strategy of building out the business.
That’s still a high multiple though making it an expensive stock (one can think of the P/E ratio as how much dollars an investor is willing to spend for $1 of earnings; as of current, that is around $800 for every dollar of earnings). The company misses earnings more often than not with the bulk of revenues coming from its low margin ecommerce business, but Wall Street gives the company a pass because part of those misses are a result of investing in the business (that includes buying other companies like Twitch for a cool price tag of nearly $1 billion). Furthermore, as of this today, they announced they are opening a brick and mortar in New York City (a further drain on the bottom-line).
AAPL is instead given a P/E more synonymous with low growth, value stocks (it currently trades at a 16x multiple making it a cheaper stock; in other words, an investor would only have to pony up $16 for each dollar of earnings). But this is Wall Street in a nutshell; bizarro world full of hypocrisy and shenanigans. The stock has gone through P/E compression before (sometimes multiyear ones) which in retrospect, always served as perfect opportunities to accumulate, dollar cost average, and for those who enjoy trading, doing exactly that (day trading).
So yes, while I also do feel AAPL is undervalued, I believe there needs to be a balance between actual financially engineering a rapid move to fair market valuation (like Icahn’s $200 price range) and actually pulling the trigger with share repurchases when they are needed (as history has shown, there are always ongoing external factors at play that can cause the market to tank).
Put it even more simple like, I’d prefer Apple to have that dry powder on tap to repurchase at $90 than the current $100 range. Why’d I say $90? Having seen everything this stock has gone through, it would not surprise me to see some kind of external event, take the market including AAPL down to various support levels. This same “unthinkable” happened when the stock hit its pre-split all time high of $700, and subsequently dropped all the way back to $390 in April 2013 (and then revisited that support level again in late June 2013). Based on post split prices, this is around $56 per share.
There is also a huge gap between $75 and $84 that exists from around April 2014 (when Apple announced the increased share buyback and 7-for-1 split); again from having been in this stock for so long, those gaps eventually ended up getting filled at some point (no matter how “unthinkable” it seemed). And this is why for myself, I’ve changed my previous stance of no longer accumulating AAPL shares (after re-evaluating the previous Apple event news), to actually placing a GTC limit buy order around that price range. I did not follow through with my earlier “divest into the rally” statement that I made in that post due to the aggressive share buyback plan and 7-for-1 split (an initiative meant to make AAPL shares more affordable for newer investors).
The thing is that this tight P/E compression will eventually uncork. Apple’s move into fashion (Apple Watch) and payments (Apple Pay) are going to be huge growth opportunities. What Wall Street and analysts are going to have to wrap their minds around is that the latter, isn’t a sexy kind of physical product that Apple is usually known for. And with regards to the former, these same folks are going to have to move beyond the technical angle with these consumer wearables. The Apple Watch itself is a longer term play (nothing like the iPhone or iPad in terms of rapid trajectory).
Finally, I no longer really believe that the Apple TV in its current incarnation, will be a huge growth opportunity. 4K resolution televisions are going to be quickly driven down in price (there is no premium product category in this area especially where most consumers do not upgrade their sets often). Icahn however assumes Apple will be going into the Ultra High-Definition (8K) television set market in 2016. That’s jumping the gun a lot because 4K has real broadcast/distribution side issues similar to the ones that slowed the adoption of 1080p high definition; the bigger obstacle remains regarding compression technology that will allow actual video media at that resolution, to stream/download over current day pipes (varies by country but the US broadband situation isn’t that much different compared to what I wrote back in 2012).
The US is far down on the list at number 13 with an average peak Internet speed of 37 Mbps. Hong Kong tops the list at 65.4 Mbps, followed by South Korea at 63.6 Mbps, and Japan at 52 Mbps. This is all terrestrial/wired networks (not wireless speeds).
LTE in terms of wireless is in a much better state than it was 2 years ago, but most service providers have data limits (unlimited data is a rarity). Thus you have great bandwidth but are mostly limited in the amount of data that you can download without paying a lot more to raise those caps. Basically, a 4K television is useless without the content encoded and delivered at that resolution. And in the US, the current average broadband speed isn’t going to cut it.
HEVC (High Efficiency Video Coding) aka H.265, is the natural follow on to H.264. This new standard doubles the data compression of H.264 for the same video quality. Thus a current day 1080p video encoded via H.264 with a total bit rate of 8Mbps (audio + video) would clock in at around 7-9GB; an H.265 version would be half those amounts (3.5-4.5GB). 1 hours worth of 4K resolution still represents 14-18GB of data. In other words, that is still plenty of data to move around.
Japan’s public broadcaster NHK is working on Ultra High Definition as well (8K) and part of that work involves coming up with even better compression techniques to reduce the data requirements. 8K is truly remarkable (the visuals actually pop out and have depth to it – NHK studios in Shibuya have tours including demonstrations of the technology they are working on) but completely unrealistic for general broadcasting at this juncture in terms of the bandwidth and hardware required. We’re reaching the tail end of 2014; where exactly is this 4K content? And Icahn believes Apple will sell $1,500 UHD sets in 2016 when content at half the resolution, is still likely not going to be anywhere as ubiquitous except in those countries with the bandwidth to support it. I just don’t see it happening.
Furthermore, the current Apple TV UI is terribad and doesn’t even come close to solving the generally poor interfaces that large screen video/television has. Icons representing channels are fine for a small number of them; they get unwieldy when you get closer to 50 of them, and have to use Apple’s simple remote. My opinion changes slightly (but only slightly) if you actually transpose the Apple TV UI, onto an Apple mobile device (iPod touch, iPhone, iPad) in a virtual remote app. Apple’s current remote app does not work this way though; it just gives you a blank screen (that you use in place of the click wheel for scrolling around) with an onscreen menu and play button.
Digressing though, as much as I’d also like to see AAPL also trading at a higher multiple, I’d prefer the company not have to resort to financially engineer that to happen in a shorter timeframe just so that some folks like Icahn can then exit their positions to lock in those gains (and thus put downwards pressure after the fact for the rest of us who do have much longer time frame horizons).
