Apple’s recent stock price drop from $705.07 to the low $500′s has me wondering if there’s
a worm eating away at its core. This once “can-do-nothing-wrong” company which seemed to transition smoothly during the succession of it’s superstar leader Steve Jobs to the equally plain named Tim Cook is now under scrutiny by more than just the nay-sayers. So what are the issues and should investors take advantage of Apple’s current stock price or anticipate further declines in 2013?
The Problem of Cash
Cash is usually considered as assets on a company’s balance sheet, not a liability!
It seems strange to even write those words… “problem of cash.” After all, cash and cash equivalents are considered as assets on a company’s balance sheet, not a liability. Yet many analysts and some investors seem to be concluding that Apple’s massive cash balance is negative for the stock. CNBC recently interviewed Leon Cooperman, hedge fund manager of Omega Advisors, who claimed Apple’s “financial policy” was putting it at a disadvantage to companies such as Qualcomm and Google. Personally, I think such a declaration is hyperbole but even as with a lie, there is usually some snippet of truth somewhere within.
Perhaps Cooperman’s assault is as a result of Apple’s resistance to offer a special dividend in December since so many other cash-rich companies did prior to the “fiscal cliff” resolution. I’m not really sure, but I do know that Apple has already committed to shareholders that they’ll return approximately $45 billion over the course of the next three years.
That doesn’t mean that investors are somehow discounting Apple’s cash…
Personally, I think those viewing Apple’s cash as a liability rather than an asset is suspicious. Since when do we re-write the basics of economics and take a company who is increasing revenues, carries no debt, and has a growing balance sheet is somehow a concern for investors? Of course, that doesn’t mean that investors are somehow discounting Apple’s cash. Why, I’m not sure, but certainly it seems like Cooperman is not alone. Apple could deploy its cash more aggressively but I’m willing to wait and see how Tim Cook and associates will propel the stock higher as they build the company. In fact, Apple’s wisdom of waiting to see how the U.S. government conducts its impending corporate tax reform, while frustrating to the impatient investor, may turn out to be a super-star move if corporate tax rates are lowered as a part of the debt ceiling/sequester debate.
The Problem of Competition
Samsung and in a less direct fashion, Google, pose as the only real competitors for Apple. After all, finding real competitors for Apple is like trying to find someone who could stop Michael Jordon in his prime. But if there are two companies that are and may continue to eat into Apple they would be Samsung and Google.
Projections for 2013 have Samsung widening its lead over Apple in global smartphone sales. Perhaps the most notable reasons is Samsung’s widening product line. After all, Apple tends to focus on one all-star product with little supporting cast. Unlike the iPod with its broad product offerings, and as a result broad price points, the iPhone has typically been expensive and more expensive. The iPad has experienced a similar fate. Even with the release of the iPad Mini, uses are left questioning if the premium they’ll pay for the Apple product will be realized in tangible enjoyment. Apple lacks product diversification. Combine Samsung’s broad product offerings with Google’s Android choices and it’s no wonder Apple is losing market share in the smartphone industry, especially amongst the lower price points.
Yet, the “problem of competition” is also a story of opportunity for Apple. Clearly, Apple dominates the higher price point market with almost all of their products. In fact, even those who have purchased smartphones using the Android platform are cited in surveys as saying if they felt they had the money, they would prefer to purchase an Apple product. It makes me wonder… if Apple were willing to produce a competitive product in the lower price bracket if they’d be able to penetrate these lower priced markets now dominated by their competitors such as Samsung and Google. And don’t forget about Apple’s suspected development of TVs. Certainly, they can’t expect to compete with the SmartTVs of Samsung with a noticeably higher price point.
And Samsung isn’t without its own internal issues. One might be able to successfully argue that diversity of products can lead to dilution of focus. And Samsung is nothing if not diverse. With its prongs into display electronics, mobile technology, telecommunications, storage technology and other components for electrical devices and LED technology, Samsung is a supplier for nearly everything electronic in your home.
And not unlike Apple, Samsung keeps most of the profits it makes within the company
And not unlike Apple, Samsung keeps most of the profits it makes within the company. But there remain two risks unique to Samsung from which Apple is immune. First, there is the political risk. Like many overseas companies, Samsung’s numbers are somewhat of a mystery. The financial scrutiny of the West may allude the South Korean company. Furthermore, with South Korea still formally at war with North Korea, Samsung is somewhat vulnerable to political instability.
Second, and more importantly, Samsung is a family business. With family businesses can come controversy and Samsung has three children fighting over key roles within the company such as chairman, COO, and others. Unless they can settle their family affairs, Samsung may struggle to remain focused on its goal of being every household’s primary provider of all their electronics.
A Worm in the Core?
Is there a worm in the Apple core? No matter which way you slice it, Apple has some challenges. When I look inside, I see some bruising from the competition and some seeds of opportunity. I suppose we’ll have to wait and see what Cook does with Apple before we’ll be able to assess whether or not it’s a sweet taste in the mouth of most investors in 2013.
Canadian and U.S. Real Estate Investment Trusts (REITs) have performed exceptionally well in the past 3 years. A quick look at the S&P/TSX Capped REIT Index and you’ll see 3 year returns of 18% plus and 1 year returns of 16% plus. With a modest 0.55% return Year-to-Date, murmurs can be heard among institutional and individual investors alike, wondering if REITs have fallen out of favour.
A Worm in the Apple Core?
Your Thoughts…