radarthekat

iOS_Guy80 said:

Which is another reason that phones cost what they do. Research takes time and money to develop better phones for the future. Smart phones are still a great value compared to so much other “stuff” people buy.

And all the stuff they replace.  That list is long and no longer filling landfills with dozens of separate products.  How many of us have an alarm clock radio these days?  Or a camcorder.  Or separate digital camera?  Or calculator, etc.

Tough to normalize these surveys as stock price and other issues come into play.  It’s hard to imagine a CEO actually wavers so drastically in his/her management and employee relationships as to make the swings in these surveys accurate.  And that should tell you a lot about any given ranking along the way.  

I guess it’s like Buffett says, popularity contest in the short term (voting machine), weighing machine in the long term.  Better ways to measure the character of a person than anonymous surveys.  

People see buybacks all wrong.  “Apple buying back their own shares...”

Let’s re-phrase that to add just a tiny bit of insight most somehow miss. 

Apple takes a bit of the cash, which belongs to us shareholders, and instead of giving it directly to us and thereby forcing a tax liability for each of us, it uses that cash on our behalf to purchase for each of us a larger ‘share of the company.’   Did you read that?

You see, people get hung up on the notion of their personal share count.  I think many people would consider it a good move on their part if they re-invested their dividends and later saw the share price rise.  They see a higher number of shares in their account and a higher share price and that affirms their choice to buy more stock with the cash Apple paid out to them.

Of course, share buybacks have exactly this same affect, just without the intermediate step of having the government step in and claim 15-20% off the top after the cash is paid out but before it can be used to buy more shares.  

The other difference is that rather than increase the number of shares the shareholder owns while the total outstanding share count remains unchanged, in this case the shareholder’s number of owned shares remains the same while the total number of outstanding shares (the denominator) decreases.  Folks aren’t good at math, so let me just tell you, the effect is the same as soon as you stop thinking in absolute number of shares and start thinking in terms of your personal ownership percentage of a business and its future profits.  

As a long term investor, and this is who share buybacks are designed to benefit, you want your percentage ownership of the business and its future profits to increase.  That’s what you want.  You shouldn’t care whether that’s by your own personal dividend re-investment actions or by management’s actions to buy back shares.  Except there are potentially two advantages to having the company act to increase your percentage ownership over your own ability to do so.

First, as mentioned above, the tax issue.  You’ll avoid the immediate tax hit, leaving more money to increase your ownership percentage, and over time that extra juice can have a compounding affect in your favor.  As Buffet has stated, every dollar a young man saves and invests can return $20 over the course of his life.  Same principal here on deferring taxes.

Second, company management knows better than you or I the future prospects of the business (which informs whether to retire shares) and also the likelihood the business is undervalued at any given time (which informs when to retire shares).  

So share repurchases do exactly what educated and insightful long-term investors would want; to increase their percentage ownership in what they deem a great business at attractive prices while deferring tax liability.  

Go back and read that a second time.

Having heard these discussions here for years my view is that those who argue against retiring shares are simply uninformed or unable to see the practice for what it is; a tax favorable and well-timed investment by a business on behalf of its long-term owners.

Share repurchases also benefit potential shareholders - those considering making an investment in a business.  By removing unproductive cash from the balance sheet and using it to reduce the share count, a business increases the percentage of each dollar invested representing the operating business.  And at the same time increases the ownership percentage represented by each remaining outstanding share.  As a potential investor you want your invested dollars [capital] to purchase an operating business that produces outsized returns, not static and unproductive cash.  

There was a time a few years ago, back when Icahn was carping, that each dollar invested in Apple shares represented only 75 cents invested in the operating business and 25 cents invested to buy a bit of Apple’s cash hoard.  Most casual investors don’t think about that.  But what if you said to your broker, “please invest $100,000 from my account in this company I feel is a good business” and your broker replied, “sure, but I’m going to invest only $75,000 in the company’s shares and let the other $25,000 sit and do nothing for you.”  You’d question his action, and yet that’s exactly the decision that all of us investors faced, and made, when we bought Apple shares back in those days.  Get unproductive cash off the balance sheet, and put it to good use. 

Can you hear me now?!!! 

the monk said:

lkrupp said:

If they have a case then let them sue Apple and see. Looks to me like they’re just trying to pressure Apple through public opinion.

Well, uh, yeah, considering the number of cases before the courts and the amount of money small companies would have to spend to sue Apple. I'm not in favor of their position, but you cannot just use the usual, "then just sue them" as a simple way to negate a point of view. And public opinion is not a bad way to settle issues. I mean, why do we have the First Amendment and these forums?

Responsible public debate, yes.  Not deception by leaving out important points, like that MDM is specifically stated to be used in enterprise, not personal apps. 

From Gene Munster: ““If I look at the broader analysis across Wall Street today, I think that there is a critical missing piece specifically about what’s the proper multiple to put on this company,” Gene Munster, Loup Ventures managing partner, told Yahoo Finance’s On The Move Wednesday. “The key distinction here is that investors typically think of this as a hardware business. Understandable, given that 80% of its revenue is hardware. But keep in mind, 35% of earnings are services-based and over the next few years, the company is progressively going to start to sell a hardware as a service.”

Long-time AI readers will note that I’ve been pushing this line of reasoning for a few years.  I learned in my decades building software startups that venture capital typically gives a higher sales multiple to software/services businesses versus hardware/physical-product businesses, because the revenue of the former is recurring and more predictable.  Services gets around 7x revenue versus 4x for makers of physical products.  And if you look back at Apple’s valuation on a multiple of revenue basis you’ll see that it’s been valued in the 3.5-4x range for a decade (currently at 3.8x).  A decade of astounding growth; the market is simply myopic in adherence to these revenue multipliers.  Netflix, a pure services business with far less profit per share and less assurance of ever getting to a low P/E ratio, has consistently been valued up at 7x Revenue.  

So what Munster is saying, and I’ve been saying for at least three years in comments here, is that it’s inevitable that the services side of Apple’s business, as it becomes a more significant portion of total revenue and therefore comes onto the radar of analysts and investing institutions, will get a higher valuation and will therefore raise the valuation multiple of the entire company.  This will affect P/E, but it’s not a P/E-focused valuation.  It’s about revenue; recurring, predictable revenue.  

Watch the revenue (Price/Sales) multiple, currently at 3.79x, climb beyond 4x to something that reflects the services portion of Apple’s revenue being valued close to 7x.

An overall valuation of 4.5x during the next year while Apple continues to work through the smartphone market slowdown gets the stock to $250.

And then a 5x revenue valuation after that as hardware stabilizes and begins to grow again gets the stock to $277, climbing higher as services grows as a percentage of total revenue.  

Eventually a 5.5x valuation mix, and a bit of overall revenue growth (up 15% two years from now versus today), results in a stock price of, remarkably I just did this math and the result is... $350.46.   Munster is saying $350.

Maybe higher with buybacks and some excitement over new product categories.  And you can watch it play out simply by monitoring the Price/Sales metric under Yahoo Finance’s Apple Statistics page, or your preferred financial website that reports the same stats.  

See you at $350!