Friday, August 6, 2010

Android Beats Apple: Part 1, Android, the underdog? Upsets iPhone in Q2 Deathmatch

Ben

The news reports over the last few days that Android handsets outsold iPhone in Q2 are misleading hyperbolic and dare I say possibly irrelevant.

Except for this...  No one gets to win.

No one gets to win.  I know, it make for terrible headlines but Apple and Google have already won seats at the table.  The players yet to be introduced are HP, and Microsoft, and the legacy players that could resurrect themselves Blackberry and Nokia.  The goal is different for each of them but what they seek most from the vast mobile market is not so much dominance as relevance.

It is in this context that Q2 sales reports are a big win for Google Android.

Google decided long ago that they needed to have a presence in the mobile space Must read Google Blog entry from Sept 2008 about the future of Mobile

The only reason Google bought developed and released Android for free was to insure a future with Google ads in it.  It was entirely possible that the mobile phone market might have developed without an effective way for Google to sell ads.  (perish the thought) My original view was that Google had modest ambitions and wanted to control the mobile space enough to insure that they would have a seat at the table.  That was before iAds (and the dark times...)  I was way under shooting the mark of how fractured the market would become and as a result how important it would be that Android be very successful in its own right.  What the recent news articles confirm is that the incredible sales growth, speed of development and diversity of options of the Android Platform virtually guarantee Google will be selling ads to millions that are served to billions of users using mobile platforms in the future.

As Nokia Will tell you (111million device sales at an average price of 61 EUR and a net profit of about 90 cents a unit... ouch!).  Unit sales do not translate into profits.  Google has a working model in search but the metaphor for how we relate to our date could change drastically over the next few years (hello FlipBook).  and their goal will be to make sure that the investments they have made in Maps, Nav, Docs, Mail, and operating systems will insure they have plenty of fertile advertising ground.  (they will)

Author is Long Apple and wishes he was smart enough to buy Google when it came out at $90.




Thursday, August 5, 2010

Apple Cash and Marketable Securities to be valued at more than 50 Billion by September Quarter


Ben

Look I confess to being an Apple fanboy.  I buy their products and I own the stock.  That does not meant that all is well in my nearly one way relationship with the company....

46 Billion Dollars.

Warning Full on RANT. Chart Link Asymco

I will state my proxy for future voting that Apple is not acting in the best interest of shareholders in regards to retained earnings policy.

46 Billion dollars.

A company, any company, on principal should keep enough cash on hand to support its operations capital investment need in order to fulfill its corporate mission.  That mission is ultimately to provide return to shareholders.  Outsized retained earnings provide a disinsentive to management to performf

Cash provides no return (or hideously little and in either case far less than presumably the firm is designed to earn in its core business) gives management incentives to invest in things outside the core competencies of the company, Makes the firm a takeover target (not likely here) and has a miniscule effect on the value of the firm (a dollar is worth a dollar A dollar of a firms earnings are worth many times that).

Notice in the chart Cash and short term marketable securities have been flat to declining since Q4 2008 virtually all of Apples surplus capital has been invested in long term marketable securities.  This is evidence that Apple knows they have nearly no use for this cash since even though they are marketable they would take a significant loss if interest rates were to rise.  

Apple have rendered illiquid 21 billion in cash by investing in long dated securities. In the 9 months of this fiscal year Apple has generated 11.9 Billion in cash. Of that 92% 11 Billion was invested in long term (maturing in more than a year) securities (Corporates, Treasuries, Munis?). As a conservative trustee of shareholder assets Apple will hold these securities to maturity. Effectively Apple is saying they have no use for 21 billion dollars in the next ~2+ years...(it could be 10 we do not know the maturity dates of the securities they are acquiring)

Apple should return to shareholders cash it does not have a reasonable expectation of needing for operations Or capital investment into other businesses. 

When you price a stock you subtract the cash from the market cap before you do your multiple of earnings calculation.  We don't usually take the time because the "Net Cash" after liabilities a company has is often too small to matter.  In round numbers Apples cash horde is 20% of the current market cap.  meaning that Apple is effectively trading a an approximate P/E of 13.5.

46 Billion Dollars

OK so you say Apple needs money for investing in Product iX the next magical and revolutionary device to be announced.   Since 2006 Apple has more than doubled its cash position while investing in development of a dozen new computers, 4 iPhones, iPad, half a dozen iPods and a semi mythical data center in North Carolina. 

You know what is bigger than 46 Billion? ...  51 Billion.  That is what they are likely to report in Q4

Apple should pay a dividend or repurchase shares
A reasonable divident pay rate is 50% meaning that ~50% of Net Income is paid out in dividends. Based on my back of the envelope calculations fiscal 2010 earnings will be ~$15 per share indicating a $7.50 per share dividend (~3% Yield). If Apple did this on a go forward basis they would still have 50 Billion in cash before the end of 2010 and continuing to accrue cash at well over 500 Million a month.

According to S&P the longer term average cash position (which unfortunately omits debt) held by the Fortune 500 is 6.6% (Currently 10%) of their market cap. Apples cash position is roughly triple that. And to repeat... Apple has no debt, ZERO.
So lets say Apple used the current market as a gauge for prudent cash management and planned on having 25 billion (10% of market cap) on hand. This would make 21 billion dollars or 22.65 per share available to distribute to shareholders.

Non-financial companies in the S&P 500 index reported $837 billion in cash at end of March Apple by itself represents 5.5% of all cash held by the fortune 500.

With the use of leverage There is not a single US corporation that Apple could not buy, so here is the question for Apple shareholders. What company valued at greater than 20 Billion dollars could Apple buy with their cash horde that investors would see as positive news to investors?  HINT...  Apple has never purchased a large company and is very unlikely to  buy any of the media companies or Google for regulatory reasons. ......Anyone? ..... Anyone? ....Bueller?.

Analysts... Et Tu?

None not one of the analysts covering Apple asked about their cash position in the last call. I suspect for a couple of reasons. 1 they do not own the stock. 2, they are interested in the stock price and where is its going and the cash position as I mentioned earlier is de-minimus. and 3. They curry favor with Apple.

You want to follow their advise?

The truth is that the only reason Apple has for keeping any cash outside of what it a needs for Cap X, and operations is that they can.... It  protects management from future mistakes.  Why would Apple give up the cash if investors are not effectively asking for it..  Abetter question from my perspective is Why should investors want to subsidize managements insurance?

Ok so 46 Billion is a big number and hard to get your brain around here is a list of things that are46 billion dollars.

There are only three individuals in the world worth more... (Gates, Slim, Buffet)
Total dollar value of Electronics exports from State of California in 2008 $48b

Foreign currency reserves Argentina 2008 $46.6b
N.J. Pension Deficit $46 b
Smart Grid Spending Forecast by 2015: $46 b
Massachusetts State Pension Fund $41.3 b
Just for fun...
Major League Baseball gross revenue 2009 $6.6b


Other links
Fortune on the Sustainability of US Corporate Cash Positions
Asymco Cash analysis



Author is long Apple and would like current yield from his investment in Apple