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Apple $400: A look at Apple's fundamentals, Part II - Page 2

post #41 of 53
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Originally Posted by Dr Millmoss View Post

Bottom line: Apple doesn't need cash reserves of this magnitude to do anything short of staving off Armageddon, and since they will never have enough for that eventuality...

I think it's just a question of degree, but the huge cash pile might come into play at some point if some new technology is discovered that can only be produced in relatively small quantities and Apple could buy up or pre-order with cash, a few years' supply to get ahead of the competition. They did this to a very limited extend with Nand Flash memory a few years back.

Lets say some scroll up screen can be built with some new rare metal... $10bn in cash buys you exclusive rights for 5 years; that's a helluva market head start.

Other than that, from an investor's point of view, $15bn in dividends per year would be nice...

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post #42 of 53
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Originally Posted by Zoolook View Post

I think it's just a question of degree, but the huge cash pile might come into play at some point if some new technology is discovered that can only be produced in relatively small quantities and Apple could buy up or pre-order with cash, a few years' supply to get ahead of the competition. They did this to a very limited extend with Nand Flash memory a few years back.

Lets say some scroll up screen can be built with some new rare metal... $10bn in cash buys you exclusive rights for 5 years; that's a helluva market head start.

Other than that, from an investor's point of view, $15bn in dividends per year would be nice...

Normally we're talking about a few hundred million for this sort of thing. Apple is socking away nearly $300m a week. If Apple went absolutely totally nuts and starting paying investors a very hansom 2% dividend, they could pay for it out of about four months of free cash flow, and still be socking away about $10b a year for the other eight. (At the present rate of accumulation, which is still increasing.)
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post #43 of 53
For Andy, perhaps to be answered in the next segment of your analysis:

1. What would the departure of Steve Jobs, say for medical reasons, do to the short and long term stock valuation? Would this matter if he went on another temporary (say 6 month) leave of absence vs. a permanent leave due to terminal illness?

2. I have seen analyst estimates placing the iPhone at approx. $150-$190 of the valuation of AAPL. Given the recent increase in Android market share, particularly in the past two (2) quarters, is this segment reasonably valued or over/under weight the companies growth potential.

3. Does the future availability of the iPhone from other U.S. carriers materially impact #2 above, and if so, to what extent?
post #44 of 53
Quote:
Originally Posted by Dr Millmoss View Post

Normally we're talking about a few hundred million for this sort of thing. Apple is socking away nearly $300m a week. If Apple went absolutely totally nuts and starting paying investors a very hansom 2% dividend, they could pay for it out of about four months of free cash flow, and still be socking away about $10b a year for the other eight. (At the present rate of accumulation, which is still increasing.)

If I were to distill the point of dividends, it is to hand back to shareholders the profits that a company would otherwise have no clue what to do with OR after the fact, as is the case, just hand you cash that is sitting there. This is what you ask.

My simple question is, why would you ask for this? Sell a portion of your position to reward yourself that dividend that you desire. Too naive?
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post #45 of 53
Quote:
Originally Posted by mobility View Post

If I were to distill the point of dividends, it is to hand back to shareholders the profits that a company would otherwise have no clue what to do with OR after the fact, as is the case, just hand you cash that is sitting there. This is what you ask.

My simple question is, why would you ask for this? Sell a portion of your position to reward yourself that dividend that you desire. Too naive?

I would ask this because your first statement was accurate. The money is doing nothing to expand the company's business. The shareholders do own the company. They have every reason to expect that their company won't hoard money for no other apparant reason than bragging rights.
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post #46 of 53
At the end of the day all investment is a risk and a guess at what will happen. Analyzing with these methods help to protect your money but it's not what leads you to the massive returns.

Back in 2004 I wanted to invest but didn't have the money to do so. I was fairly certain that Apple was going to get bigger and become worth a lot more. But that was based on looking at what the company was doing and where you could envisage them going. The iPod was new and you could tell it would be big, form that you could see at some point there would be a phone and there Macs would get more popular. For years there were rumors of a phone and updates to iPods for videos etc.

Now though I'd say it's a bigger risk. There wasn't much chance of loosing money with Apple back then compared to the gains. Now though the iPhone could fail at some point, phones are a very risky market and peoples interests change. And where is the growth going to come from? A recent forum topic on the next OS X seemed to only contain features from Windows 7, and Apple TV doesn't look like it's going to make a huge amount in the future. It could be TV's but then the iPod HiFi failed so what's to say a TV wont as well.
post #47 of 53
Quote:
Originally Posted by Dr Millmoss View Post

The investment of cash returns very little, especially in the current interest rate environment. Either way, Apple is not a bank. They are not in the business of becoming an investment management company (hardly their core competence). Profits are supposed to be capitalized, used to grow the business they are in. Apple's ROI is so huge now that they cannot possibly reinvest even a tiny fraction of their cash reserves in this way, let alone the billion or more which pours in every month.

As problems go, it's a great one to have, but I do find myself constantly reminding people that Apple is NOT in the business of accumulating cash. It has little value to the company if it is not spent, and none to stockholders if it's not returned in the form of a dividend. (For the record, I'm not a fan of stock buybacks.)

And people keep reminding you that Apple's competitors also have significant warchests.

Picking a cash chart randomly using google:

http://ycharts.com/calculations/rank...y/cash_on_hand

Apple ranks 4th behind Cisco, MS and Google. Given that AAPL and GOOG appear to be at odds in at least one significant growth market (smart phones) and APPL has challenged GOOG in the ad market then the $24B that APPL holds is reasonable in any strategic battle between the two companies.

Your position is that CSCO, MSFT, GOOG, AAPL, ORCL, INTC, HP, IBM, DELL...systemically across the entire technology sector...are fools for holding billions in cash because they aren't a bank. Even dinkly little Red Hat is sitting on $800M in cash (4 years worth of revenue).

So either all these CFOs are clueless and somehow don't understand that cash has "little value to the company" or you are missing some key advantage of holding significant cash in a tech company.

Gee, I wonder which scenario is the more likely?

Just because you can't imagine a good use for billions doesn't mean that use doesn't exist or having that kind of war chest has no value.

GOOG showed the value of a huge war chest in compelling other companies to do what they otherwise wouldn't do just to make sure that GOOG stays away. They bid $4.6B on spectrum just so that Verizon and AT&T in order to trigger open handset and open app terms came into play. The threat isn't compelling just to have enough to bid $4.6B and win spectrum but sufficient ability to spend the capex to directly compete against VZW and AT&T. They were prepared to win AND use it. You can't do that with "a few hundred million".

http://news.cnet.com/8301-10784_3-9910932-7.html
post #48 of 53
Quote:
Originally Posted by nht View Post

And people keep reminding you that Apple's competitors also have significant warchests.

And this is changes anything I've actually said?

I am a very significant stockholder of AAPL, in terms of my own portfolio, so this is my concern. If I was stockholder in the other companies, I'd be concerned about them stockpiling dollars for no clear purpose too. (Actually I do have some ORCL.) More to the point, the fact that other companies stockpile cash for no apparent business reason does not make it good for stockholders.

The "war chest" term is simply a convenience. It sounds purposeful, but is not necessarily a description of reality. Even the most extreme example you can think of in which even a portion of it is used (more like waved around), amounts less than 10% of Apple's cash on hand, and to put it in even better perspective, amounts to only three or four months of cash accumulation at the present rate (which again, is steadily increasing). I continue to repeat this because apparently perspective is lacking in those who seem to believe that the goal of business is piling up big gobs of unused cash.

I never said anyone was clueless or fools. I also did not say the cash had no value. I specifically and deliberately said that it little value. If you want to debate these points, please stick to what I've actually said.
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post #49 of 53
Quote:
Originally Posted by Dr Millmoss View Post

And this is changes anything I've actually said?

Yes. Apple was competing with GOOG for AdMob that eventually sold for $750M. It did buy Quattro for $275M. It purchased LCDs for $500M, and NAND for $500M for competitive reasons. These are uses that APPL used cash to enhance their strategic position vis a vis other large competitors with equally deep pockets.

You can't do that with a "few hundred million".

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I am a very significant stockholder of AAPL, in terms of my own portfolio, so this is my concern. If I was stockholder in the other companies, I'd be concerned about them stockpiling dollars for no clear purpose too. (Actually I do have some ORCL.) More to the point, the fact that other companies stockpile cash for no apparent business reason does not make it good for stockholders.

Just because the purpose is not clear to you means that it has "little value", significant shareholder or not. Repeated assertion that the cash has little value doesn't make for an argument when you cannot refute the uses that GOOG has done with it's billions with respect to the effects it wants to achieve. You can argue the value of those effects but you haven't done that either.

"Hundreds of millions" is a non-threat. Billions is a real threat. The ability to threaten has significant value in compelling competitors into not engaging in behavior you don't want them to.

With roughly equal amounts of money, neither AAPL or GOOG is going to indulge in any excessively destructive behavior toward the other. $300M in an ad company is a shot across the bow. Not a full on vendetta vs GOOG.

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The "war chest" term is simply a convenience. It sounds purposeful, but is not necessarily a description of reality. Even the most extreme example you can think of in which even a portion of it is used (more like waved around), amounts less than 10% of Apple's cash on hand, and to put it in even better perspective, amounts to only three or four months of cash accumulation at the present rate (which again, is steadily increasing).

False.

The most extreme example I have provided is GOOG creating a competing internet infrastructure using it's purchased dark fiber as the backbone and expanding it's already declared intentions to provide 1 Gbps to the last mile to a wider market if the net neutrality war had gone badly. This vastly exceeds the amount of cash GOOG has at the moment BUT it's a credible threat because GOOG could do so for key markets that VZ doesn't want additional competition. GOOG makes money selling ads not bandwidth...sell bandwidth in the same way the iTunes store sells content (a little better than breakeven) in lucrative VZ markets would seriously dilute the value VZ's huge investment in FiOS.

Even the limited rollout stated will cost GOOG billions.

Or it could buy TWC, who's market cap is $19B, for that last mile access. Or Clear for wireless.

Again, simply purchasing $4B in spectrum (or threatening to) or buying gobs of dark fiber isn't a real threat if you can't leverage it directly against a major industry player trying to rain on your parade.

http://www.dailyfinance.com/story/co...tice/19352945/

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I continue to repeat this because apparently perspective is lacking in those who seem to believe that the goal of business is piling up big gobs of unused cash.

So a big pile of unused nuclear weapons is equally of little value if you aren't engaged in a nuclear war?

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I never said anyone was clueless or fools.

Except you deeply imply it. Only a fool is going to hold on to something of "little value" if they can leverage it to massively grow their business/profits/shareholder value.

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I also did not say the cash had no value. I specifically and deliberately said that it little value. If you want to debate these points, please stick to what I've actually said.

Which is exactly what I said you had written with respect to cash.

I said that you believe that a warchest is of no value which you reiterate above by claiming it isn't a reflection on reality and simply a term of convenience. Something that doesn't really exist in reality has what value? None.

The stated purpose for a huge wad of cash is for "big, bold risks". This isn't JUST acquisitions.

$46B is 2-3 years of VZ CAPEX.

If APPL wanted a fab, that's $4B CAPEX just to get started without all the R&D for process improvements down the line. An automated factory like NeXT had would cost billions given AAPL's volumes.

If they wanted something truly big and bold, $46B isn't all that much money if you didn't also want to bet the farm on it.
post #50 of 53
I say what I mean. No need for your inferences, which are only for your satisfaction and avoidance of the issues which I have raised. Again, stick to what I say, and we'll both be better off. Other than that, you've essentially avoided all of my basic points for the purpose of repeating yours.

Your suggested mega-acquisitions are a perfect example of why the level of cash Apple is accumulating is potentially dangerous. We'd better hope they are never tempted to buy a boat anchor like TWC. If you're a stockholder you should dread the possibility that they make such a "big and bold" move. The history of huge mergers is not a pretty one.
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post #51 of 53
Quote:
Originally Posted by Dr Millmoss View Post

I say what I mean. No need for your inferences, which are only for your satisfaction and avoidance of the issues which I have raised. Again, stick to what I say, and we'll both be better off. Other than that, you've essentially avoided all of my basic points for the purpose of repeating yours.

Your suggested mega-acquisitions are a perfect example of why the level of cash Apple is accumulating is potentially dangerous. We'd better hope they are never tempted to buy a boat anchor like TWC. If you're a stockholder you should dread the possibility that they make such a "big and bold" move. The history of huge mergers is not a pretty one.

And you continue to ignore all the other examples. Mega acquisitions is the smallest part of the example. TWC would have significant value to GOOG not as a direct source of profit but for the instant infrastructure and time to market for their own services in a scenario where ISPs played hardball with net neutrality.

The fact is that the major tech companies all hold lots of cash.
The fact is that GOOG has used its hoard of cash to its advance its strategic goals.

Your opinion that cash is of little value is simply unsupported beyond your repeated assertion that it has little value.

The only other support that others (and perhaps you) provide is that the money belongs to the stockholders. Except that we've seen that common stock holders really don't own anything in terms of corporate assets. Ask GM shareholders what assets belonged to them. Nada.

AAPL shareholders own nothing but the shares they hold and the potential future price for those shares. They don't own the company in any other meaningful way as seen in corporate bankruptcy.

Oh, and the use of "" does mean I am directly quoting what you say. So I am sticking to what you say. If the words you use does not convey your actual meaning that's not my fault.

I'm not avoiding your basic points as much as you aren't making any...what supporting evidence do you provide that the money the tech industry is holding is of "little value"?
post #52 of 53
Quote:
Originally Posted by nht View Post

And you continue to ignore all the other examples. Mega acquisitions is the smallest part of the example. TWC would have significant value to GOOG not as a direct source of profit but for the instant infrastructure and time to market for their own services in a scenario where ISPs played hardball with net neutrality.

The fact is that the major tech companies all hold lots of cash.
The fact is that GOOG has used its hoard of cash to its advance its strategic goals.

Your opinion that cash is of little value is simply unsupported beyond your repeated assertion that it has little value.

The only other support that others (and perhaps you) provide is that the money belongs to the stockholders. Except that we've seen that common stock holders really don't own anything in terms of corporate assets. Ask GM shareholders what assets belonged to them. Nada.

AAPL shareholders own nothing but the shares they hold and the potential future price for those shares. They don't own the company in any other meaningful way as seen in corporate bankruptcy.

Oh, and the use of "" does mean I am directly quoting what you say. So I am sticking to what you say. If the words you use does not convey your actual meaning that's not my fault.

I'm not avoiding your basic points as much as you aren't making any...what supporting evidence do you provide that the money the tech industry is holding is of "little value"?

My words continue to convey my actual meaning. If that meaning is inconvenient to your argument, then I am sorry, but it doesn't reflect on me, but on the merits of your argument. The moment you begin to tell someone what they meant to say, you have admitted the weakness in your own argument.

Boiled down to their essence, the facts are really quite simple. A public company accumulating cash is presented with three options for what to do with it. The first is reinvestment in plant and equipment (i.e., growing their business). This is the ideal use of capital, from which the term and the concept of capitalism derives. If they are unable to do so, then they have probably hit some sort of barrier to growth that the money cannot cure, at least not without increasing risk significantly. Unless Apple wants to start building their own assembly and component manufacturing plants, then they have few opportunities for capital reinvestment that represents any meaningful fraction of the cash they have accumulated. Expanding into the manufacturing business presents what seem to me to be obvious risks which they have thus far avoided.

The second is the acquisition of other companies. The history of these mergers should not give anyone who believes Apple should start buying up large companies any comfort. In fact the only way they make sense is if "2+2=5" (or in common terms, "synergy" is produced). Far more often than not, these mergers result in 2+2=3. The two companies invariably have different cultures, different management styles, goals, and structures. Key people leave because they don't want to work for someone else, etc. It can take years to work through these issues, and very often they are never fully resolved. Then you get to the fundamental issue of whether the joined companies are worth more together than they were alone. This is only rarely the case. These mergers can also put the company in a weakened, not improved, competitive position.

The TWC example you suggested is perfect illustration of the latter issue, in particular. If Apple does expand their TV initiative into the set-top arena as rumored, then their ownership of one of the major providers creates an instant barrier to adoption of the technology anywhere else but within the network they own. They now want to be both a partner and a competitor. Oops. I used to hear often about how Apple should buy one of the music, film or TV companies. A bad idea for the same reason.

The third is giving at least some of it back to the stockholders. As I said before, if Apple were to go totally crazy and decide to pay us and extremely generous 2% dividend, then they could pay it out of only about 3-4 months of annual free cash flow, and accumulate many billions more on the other 8-9 months. And this at the current rate of accumulation, which is still accelerating. Some seem to believe this would still be a terrible tragedy, for reasons that have never been explained. Again, I think a demonstrated failure to appreciate the scale of Apple's cash reserves and the pace at which they are increasing, is at work here. No matter how large they get, some are of the mind that there's no logical or practical limit to the value of larger and larger cash reserves, more always being better. I don't see the support for this argument. In fact, I started raising this question when the reserves were at a paltry $25b. Now they are more than twice that much, but the reasoning of the cash hoarding advocates never changes.

Finally, stockholder ownership of a company's equity is in fact meaningful. If it were not meaningful, then the markets would be of no value or purpose. The fact that equity is often wiped out in a bankruptcy does not change this fact.
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post #53 of 53
Quote:
Originally Posted by Dr Millmoss View Post

Boiled down to their essence, the facts are really quite simple. A public company accumulating cash is presented with three options for what to do with it. The first is reinvestment in plant and equipment (i.e., growing their business).

And Apple does this. The well publicized ones are $500M a pop. Above your "few hundred million" assertion.

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If they are unable to do so, then they have probably hit some sort of barrier to growth that the money cannot cure, at least not without increasing risk significantly. Unless Apple wants to start building their own assembly and component manufacturing plants, then they have few opportunities for capital reinvestment that represents any meaningful fraction of the cash they have accumulated. Expanding into the manufacturing business presents what seem to me to be obvious risks which they have thus far avoided.

$1B data center in NC. Apple has multiple initiatives to grow their business and some evidently have billion dollar price tags for ONE segment. Just a data center doesn't buy you anything.

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The second is the acquisition of other companies. The history of these mergers should not give anyone who believes Apple should start buying up large companies any comfort. In fact the only way they make sense is if "2+2=5" (or in common terms, "synergy" is produced).

Synergy/economies of scale (2+2=5) isn't the only reason for acquisitions. Market dominance/consolidation (take Lockheed Martin), vertical integration are all valid reasons with both success and failures.

Apple buying Adobe probably wouldn't work out. But AdMob for $750M? A series of related tech companies for a total of a few billion for a combination of IP, talent and infrastructure? Sure.

Couple these with some key $1-2B CAPEX projects and simultaneous initiatives in mobile, set top and computer spaces and we're talking billions to open new markets, dominate existing markets and grow Apple's business.

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This is only rarely the case. These mergers can also put the company in a weakened, not improved, competitive position.

You will have to show that this is "rare" beyond simple assertion. There have been spectacular failures. However Exxon Mobile, GE, DuPont and other large companies are the results of successful mergers that are dominant (or once dominant) in their industries.

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The TWC example you suggested is perfect illustration of the latter issue, in particular. If Apple does expand their TV initiative into the set-top arena as rumored, then their ownership of one of the major providers creates an instant barrier to adoption of the technology anywhere else but within the network they own. They now want to be both a partner and a competitor. Oops. I used to hear often about how Apple should buy one of the music, film or TV companies. A bad idea for the same reason.

It all depends on execution. Sony used its studio ownership in its fight against Toshiba over Blu-Ray. It was both an advantage and disadvantage when dealing with the other studios. There were certainly some that went HD-DVD simply not to do what Sony wanted. On the other hand Sony had real skin in the game with respect to studio earnings and a certain level of credibility not enjoyed by Toshiba/Microsoft.

Has Sony executed particularly well the last decade? No not really...but ownership of a studio did not cause senior leadership failure.

Simply being a competitor does not mean you cannot partner. Apple owning a major content producer can be an extremely positive strategic advantage over MS in a fight for the living room.

The TWC example is one that provided GOOG with instant last mile infrastructure. Clear would probably be a better choice despite a smaller customer base.

AAPL ownership of TWC would give AAPL a seat at the industry table of major cable providers. This would be the same kind of advantage Sony enjoyed in the Blu-Ray fight as a studio as well as CE manufacturer in a fight regarding cable set top standards.

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The third is giving at least some of it back to the stockholders.
...
Again, I think a demonstrated failure to appreciate the scale of Apple's cash reserves and the pace at which they are increasing, is at work here.

I think I put it in clear context: 2.5 years of Verizon CAPEX. You think $40B+ is huge. In certain contexts this is true. In others, not so much.

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No matter how large they get, some are of the mind that there's no logical or practical limit to the value of larger and larger cash reserves, more always being better. I don't see the support for this argument. In fact, I started raising this question when the reserves were at a paltry $25b. Now they are more than twice that much, but the reasoning of the cash hoarding advocates never changes.

Strawman.

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Finally, stockholder ownership of a company's equity is in fact meaningful. If it were not meaningful, then the markets would be of no value or purpose. The fact that equity is often wiped out in a bankruptcy does not change this fact.

What bankruptcy tells you is the pecking order of common stock holders vis a vis "ownership" of a company. That in the most objective and practical measure (bankruptcy) shows it has no substantive meaning (as in stockholders get butkus) does not make the markets of no value.

The markets has immense value in making some folks richer and some folks less rich.

You don't own Apple in the normal meaning of the term ownership. You own shares of the equity in AAPL should it be liquidated. You enjoy some rights as shareholders and if you want your 2% dividends you can vote in a BoD that will make those changes.

Good luck with that.

And there aren't only three uses. I have clearly shown a another where GOOG has used its warchest to successfully influence another market to go the way it wanted. Something it could not do without the actual means to successfully carry out their threat. Neither GOOG nor VZ wanted GOOG to enter the ISP market ever. VZ has more to lose in such a fight and backed down on an issues that related to a future collateral revenue stream for them (content and eyeballs) but a primary revenue stream for GOOG.

Do you really think they willingly caved on terrestrial net neutrality?

Large warchests have real value. Just like large militaries even when they aren't being directly used to conquer other people.
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