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

Amazon Runs out of Kindles people forced to read backs of cereal boxes

I and many others made the mistake of thinking that the iPad would kill the Kindle. I mean if you want to read a book you can have either and then oh yea the iPad will bag your groceries and wash the car too, who would buy the Kindle?* Apparently a lot of folks. Amazon is sold out of it's current run of kindles. Macworld story

Looking back I think Amazon may have thought so too. (remember the whole removing publishers thing). We are reminded by reality that one product does not a market make and that there need to be alternatives. The introduction of the iPad into the marketplace may have actually increased sales of kindle. The logic saying that prior to the iPad the kindle was perceived as a fringy device and the introduction of the iPad further legitimized the market for e-readers of which the kindle is both capable and significantly cheaper than the iPad.

Cool

* Either that or amazon only ordered like 10

Subscription Friction: Time Inc bumping up against Apple Restrictions.

Peter Kafka writes about the magazine industry (Time) struggling to figure out what to do about iPad.

Charge for an app and you get paid but get no customer data (Apple keeps it) and Apple has rejected their sign in app where the model would be similar to the WSJ where you pay Rupert and get a sign-on that gives you access to the paper/Magazine. Magazines want to be able to sell subscriptions and get data about their buyers so that they can market themselves to advertisers. Paying a 30% vig to Apple and not getting any subscription data sows not sound like a winning combination. There are plenty of examples of apps that receive revenue and data about their customers but are still applications in the app store. Just not magazines.

Think about this: Noe Apples point of view. What is the question Apple is trying to answer/control?  lets assume for a moment that Apple is OK with magazines external sales then comes the question... What is a magazine?  What is effectively different about buying a subscription to Time and buying a subscription to Angry Birds? Every addition step into the structure of the marketplace they are building has huge implications for iPad,Apple and the entire competitive landscape being build around portable connections.


Brave New World

iPad apps/ magazines / media are not going to look like their real world counterparts for very long. We are going to invent (royal we) new ways to consume information that could be radically different from the way we do today

Links to smarter people than I: Magic Touchpad, iPod Touch

Two interesting bits thought of by people not named Ben...

First Andy Ihnhatko (Beloved Technology pundit) loves the multi touch "Magic Touchpad"  (I hate these names)

Andy is right it is fargin cool.  The first whiff of the  Multi-Touch Mac OS, Apple TV?

Second because the iPod touch is such a second sister to the iPhone it had completely escaped my laser like focus (but not Grubers) that in the three years since the iPod touch came out there are still no competitors to this device.

Taking Stock of Apple Stock:Revenue Projections

Ben Vested

Apple announced blow out earnings just a week ago but it is never too soon to think about what future quarters will bring.

Here is a revenue/stock price analysis of AAPL for the next year by quarter  BEFORE adding in announcement of new products.

The only really meaningful assumptions made are as follows.

1, No major downturn to the current world wide economy
2, No major supply constraints for iPhone and iPad
3, Near past trends in other products are good predictors of the near term future performance

Apple is currently selling for 19x trailing 12 earnings and has pre-anounced revenue of $18 Billion for Q4 (FY10 ending Sept 30) 

2009 coming into 2010 was confusing there was iphone ipod and Mac. 2008-9 economy sucked, The Stock Market sucked. The iMacs were due for renewal, iPod had reached saturation and The deferred accounting for iPhone made understanding earnings going forward. As a result Apples earnings were difficult to predict and a good hunk of that growth had to have built in earnings for Product X.

This year is much clearer. The economy sucks but is at least stable and Apple has shown itself to be reasonably recession proof. Legacy products (Mac and iPod) represent about half of Apples business and are stable mature businesses with some growth. The other half of Apples business are two new products very early in their sales growth. (these two halves add up to about 90% of the business) iPad and iPod.  While the iPhone is the coolest gizmo ever the iPad makes it clear that iOS and mobile computing in general will change our computing paradigm.

One open question about Apple revenue is not demand but supply, Can Apple supply the scads of iPads and iPhones the market wants?  White iPhone aside I think Apple can meet most iPhone demand but iPad demand caught Apple a little flatfooted.  I think supply of iPad will be somewhat constrained for "a while". 

Current demand for iPad is far in excess of the 1 million a month Apple spoke of (earnings call) as their pre-release manufacturing bogey.  I suspect that as a prudent company Apple built in some headroom in capacity when they made their order so while it may be difficult to triple supply as they may have to replicate an entire line/factory/expertise (or any of a million other things) I suspect that it may be possible that they were (or will in short order) able to significantly increase, even double capacity in the near term. (Total speculation)

These Tables represent EPS and the indicative price per share over the next year given a set of income projections that while bullish are reasonable. (I will go more into the model at a later date). The P/E scale is based on the highest and lowest P/E's Apple has traded at over the last 5 years. What is NOT in the model is whatever product i"X" Apple has planned for market over the next year.  So while my analysis is bullish for the products I modeled, it is conservative in that the model does not include any revenue from as yet unannounced products.  It is impossible to know what the revenue impact of for example a new Apple TV offering or a completely redone (please please please) Mobile Me service.

 

			Earnings Per Share Stock Pricing Matrix
YOY Revenue Growth	Quarter	Trailing 12 Earnings per share	15	20	25	35
61%	Q3 2010	13.28	199	266	332	465
68%	Q4 2010	15.00	225	300	375	525
83%	Q1 2011	16.88	253	338	422	591
43%	Q2 2011	17.85	268	357	446	625
48%	Q3 2011	19.56	293	391	489	685
			Dollars per Share Earnings Multiple Matrix
YOY Revenue Growth	Quarter	Trailing 12 Earnings per share	200	300	350	400
61%	Q3 2010	13.28	15	23	26	30
68%	Q4 2010	15.00	13	20	23	27
83%	Q1 2011	16.88	12	18	21	24
43%	Q2 2011	17.85	11	17	20	22
48%	Q3 2011	19.56	10	15	18	20

 

 

Take it for what it is worth. But on a historic growth basis Apple does appear to have significant room to grow.  Assuming Apples share price remains at 20x earnings, in that case Apples share price would increase 47% over the next year.  There are a couple of price barriers to Apple stock and they are related. The first is issue with growth of the share price as we look at it going forward. While I think the earnings growth for the next year or two is locked in. It is not clear what will happen next The other issue is market cap.  Apple has a market cap second only to EXXON. Fricken EXXON.

Lastly, this is not an analysis or rebuke to Apples cash position since it is stellar the cash has little effect on the stock price (Although it is hugely diltutive to ROA). and it is a good thing that they are cash flow positive 1.3billion dollars a month.

That said should pay a dividend. by the end of fiscal 2010 Apple will have ~$50 Billion in cash and marketable securities. There is no rational reason for the company to have this much cash. None.

Really Lastly. The Author is long APPLE. You need to do your own math and most certainly don't follow the advise of semi anonomous internet talking heads to buy your stocks. As a buddy of mine tells me a lot. Don't invest in ANYTHING you do not understand. for most of us that does not leave much. 

 

 

LG indicates iPad supply will be constrained into Q2 next year

Reuters reports this morning that LG cannot keep up with Apple demand for iPad displays.

The fact that they are constrained in the short run is old news that they will not catch up until 2011 is a big deal.

During their earnings Call Apple was asked several times in different ways about the nature of the current pipeline contstraints of both iPad and iPhone 4s. And while they would not say when they will get demand/supply in balance I for one left the call with the impression that there were no particular issues that would prevent a reasonably short term ramp to a much bigger number.


Tim Cook...
Both of these products, the iPad and specifically the iPhone 4, we had backlog at the end of last quarter that we were not able to fill. And currently, we are still selling both of those products as fast as we can make them. So we still are quoting longer lead times than we like and we’re looking around the clock to try to get supply and demand at balance.

Early in the questions Tim Cook mentioned that they targeted a million iPads a month for the launch but have been blown away by demand. Why did no one ask the question... How blown away? 1 million 2 million? So we know they are making more but not likely MANY more than 1mm a month right now and LG is saying they are nog going to be able to meet Apples current demands until Q2 2011. Isn't that when V2 will be out with the magical retina display and front facing face time camera?

Again Tim Cook
because if it turns out that the iPad cannibalizes PCs then I think it's fantastic for us, because there is a lot PCs to cannibalize. It's still a big market.

I took this comment initially as a little snarky but when you take it at face value it is indicative that Tim Cook believes it is at least possible that the iPad becomes a truly transformative device that ultimately (in a much later version) replaces the PC

off topic a little, ok a lot. Why did not a single analyst ask about Apples Cash position? I know we are going to get a crap answer but at least ask. More on this later.

Antennagate the Because we Can't Let it Go Edition

First it aint over...  Antennagate is guaranteed to be in the news at least thru September when they either announce more free cases OR as Steve said in the briefing  Who knows maybe we will have figured out something better by then.

I thought it made sense to apply a little critical though (ok very little)  to Antennagate the press conference.  

What is interesting  about the drop call rate is that according to Anand Lal Shimpi from Anandtech (on TWIT Sunday iTunes link) the iPhone 4 really does have a measurably more sensitive antenna and will hold onto a call in weaker areas better than previous iPhones but then he went onto explain that that in their testing the iPhone4  did have more dropped calls in stronger signal areas where the iPhone 3GS did not.  Are you fascinated yet  I mean this is scintillating stuff!  OK so what you say is the point. 

Add the fact that Steve Made clear in his presentation that they actually do not know why the drop rates are higher than the 3GS.

What if the antenna is in fact performing exactly as designed and the drops have nothing to do with the antenna?   ( I know but you can put your finger on the thing and the bars drop forget about the frickin bars for a minute)

As one possibility not because I think this is the solution but just as an example... What if the issue is something different about the way the software controls the radio in medium signal areas (ostensibly to improve battery life) that is buggy or needs tweaking?

Other stuff

It also seemed very clear to me that Consumer reports sucker punched Apple.  They effectively outlined the problem, and posed what they thought was solution.  Apple came out and provided the solution Consumer reports telegraphed would make them happy and BLAM not good enough.  

Why just AT&T returns?  I mean why not Apples?  look no black hats here just a weird omission.

I have seen it other places but the whole 1 out of a hundred thing was intentionally designed to minimize the size of the issue.  based on all the numbers I have seen none of which may be right the droped call difference is somewhere between 10 and 50% worse than the iPhone 3gs.  Try this.... Only one more out of a hundred flights crash  ( you get the point)

Look this is a real issue but it is not the reason not to buy the phone.  Apple looks standoffish they (Steve) says stupid things but over time when confronted with issues with their products Apple has  the right thing

Look for my semi annual where is my dividend rant coming soon to this blog...

Flipboard: an Electric Motor in a Steam Powered World

Ben Vested

I do not write about APPs.  I am just not drawn to reviews.  So this is not a review per-se That said... What is cool about Flipbook is what it represents.  Innovation.  I downloaded Flipboard and spent like 10 minutes just flipping the page back and forth.  It is just so frickin cool.  It is not a finished product but that is beside the point.

When the first electric motors came into use they were used to replace water/steam power in mills.  Mills were designed and optimized over time to make effective use of centralized power.  So when electric motors came along the only way people saw to use them was as a substitute for the water power.  It was years and years before factories and equipment began to be designed around the unique qualities of the new type of motor.

The iPad is an electric motor in a water and steam powered world and Flipboard is the most obvious example I have seen yet of what the future will bring.   We have no idea what this platform will look like in 10 years time.  All the existing magazines on the iPad....  Steam baby.

Look I am not saying Flipboard will survive or replace Wired/Time/People Magazines but something is going to.  The vast majority of stuff that has been produced so far has been regressive,trying to recreate the experience you get with a paper magazine.

At its most basic Flipboard is an RSS/twitter/facebook reader that aggregates your social feeds in a very unique and pleasing way.  The Tweets in your stream are presented with the entire content of the link for you to page thru.  The feeling is very much like the serendipity of reading the sunday paper.

And it is "Made with Love in Palo Alto, California"


The Wow factor is strong with this one .  Itunes Link,   Macworld Review link


The writer has no affiliation with Flipboard or Palo Alto although both seem pretty cool.  I am long Apple.

My Q3 guess

A point estimate is crap  but fun anyway  3.30 per share on 15 billion in income.  The real wildcard is what the gross margin will be.

Based on the fact that current iMacs are getting long in the tooth (read higher margin) and iPhone continues to grow as a percent of total business that gross margins will stay over 40%

A real number is somewhere between 2.90 and 4.40 a share.

There will hopefully be lots of good information on the call about pipeline constraints since current demand for iPhone and iPad appears to be outstripping supply.

Listen in at. www.apple.com/investor
5:00 pm Eastern.

Apple Earnings Preview

Ben Vested

First I was going to do a bunch of tables and charts and then I was going to do some really cool finance voo-do all over it but then I found out Andy Zaky  already did a fine job on that.  Here.  I did do a couple of charts you will find below.

This will be more information than you require (hat tip Hodgman) but here it is anyway.  I follow Apple as a company because (within normal healthy adult limits) I love tech, Apples products, the way they go about their business and the fact that they are a large successful easy to follow company.  I invest in them because in addition to all of those things, their business and the engine that drives their earnings can be understood.  Look, GE is a great company but based on their published financial statements three PHD's with a Ouiji Board and a bag full of darts could not figure out what is going to happen next with the company.

Apple is simple by comparison.  iPod, iPad, iPhone, Mac, and other stuff.  Apple is unique in the hardware space in that they make coin...  Apple is making money in two industries populated by companies fighting to do their best impression of Eastern Airlines (commodity out of business).    Nokia by far the largest maker of mobile phones by unit sales is losing money.  Dell the largest US maker of PC's has a 3% profit margin.  Their relative performance in the stock market over the last 6 years tells the story.

Apple is a hardware company, and they win because they innovate.  They refuse to compete on price and over time have produced time and again products that customers are willing to pay a premium for.  Apples ability to grow in the future will be tied to this simple equation.

You can argue at the margins but something between 45-55% of the companies earnings this year will be derived from product classes that did not exist before June of 2007.  iPhone came out in June 2007 and will have something over 20 billion in revenue this year.  iPad just came out this year and already is lighting up the revenue meter it should represent ~8% of 2010 revenue.

Here are two charts that show both revenue growth AND the contribution to growth by product.
This is revenue growth in dollars broken out by product.

Note 2010 projections are from Andy's analysis, they are as likely to be right as any (a little optimistic)  I used Apples presentation for products because It shows how the growth in Macintosh has been driven almost exclusively by laptops over the last 5 years, the last 12 months being an exception.  I have written about this before but Apple OWNS the over 1,000 computer market.  During a time when Dell and Asus are fighting over fifty bucks for a netbook Apple has been able to get the average price per unit for desktops to go up.

Iphone is obviously experiencing explosive growth as is iPad.  What has been surprising about the iPhone is that three years after launch the iPhone has maintained a PPU of over 600 bucks.  Estimated margins on iPhone are 60% so as the product mix moves towards iPhone Apples overall margin continues to expand.

This chart is the same data presented as a percentage.  It is here that you can see the relative importance of new products as a percentage of earnings.  The three big growing categories iPhone, iPad and Other music and related services (read this as APP store).  This category is going to grow like Kudzu in July over the next few years.

Longer posts coming on the following

Apples Cash position.  Apple is piling up cash at a rate that will force it to change its current accumulate cash forever strategy or not.  Currently they have about 47 bucks a share in cash and short term securities.  It is a stupid amount of cash that management cannot with rational argument hold onto given that they have zero debt and are continuing to accumulate cash at a rate of OVER 1 billion a month.  More on this later.

What happens next.  Apple will not make any new product announcements today but as sure as Microsoft will announce products that they will never make, the NEW is coming and it will be Magical and Revolutionary from a profitability standpoint .

Risks.  Apple is now huge. a lot of the poor PR in the last year has had to do with this size.  Size is also an issue in that they are running up against the law of large numbers in terms of their ability to grow.  Exxon Mobil is the only US company with a larger Market Cap and in order to maintain its current growth rate would have to create 20 billion in revenue next year that it did not have this year.  I am not saying it won't happen just pointing out that it is a big number.  Life after Steve not a happy thought.  There are others... Margins.

More after the announcements tomorrow.

The author of this post is long Apple but makes no recommendation for purchasing equity positions in the company.  Your grown people make your own decisions.  The author has no holdings of Eastern Air, Dell, Nokia or Greek sovereign debt.