Great things are expected of the most valuable company on the planet.
Apple, which has a world-beating market capitalisation of $776bn (£598bn), is still meeting those expectations, but barely. And that could cause headaches down the road for investors and for the stock market as a whole.
Apple shares, among the most widely held in the world, hit a record last Friday, yet the company’s sales have been so-so and no new game-changing gadgets other than a revamped iPhone are in sight.
“Apple has ushered itself squarely into a new normal of pedestrian growth,” Edison Investment Research said, summing up the market reaction to Apple’s latest quarterly earnings report last week on Tuesday.
In a nutshell, after a stumble last year, Apple started to grow again late in the year and continued to do so in the first three months of this year, but not by much. Revenue in the first quarter was 5 per cent higher than over the same period a year earlier – a respectable but hardly eye-popping performance, and one that won’t restore Apple’s old reputation as a paradigmatic “growth company”.
Yet Apple’s stock rose last week, after increasing more than 28 per cent this year. The company generates profits on a barely conceivable scale. So what’s the problem? It is simply that Apple’s standing in the stock market has largely been built on that ageing little object, the iPhone.
A major iPhone rejuvenation is expected in September, the 10th anniversary of its birth. That is likely to spur greater sales, for a while at least. But how long can the iPhone wield its financial magic, and will the company come up with another invention with awesome monetary powers?
It may seem unfair to quibble this way, given Apple’s technological accomplishments and financial position. The company makes useful and reliable, if expensive, products. I’m typing on a Mac, have an iPhone in my pocket and an iPad tucked away in my backpack, and all have served me well. The Apple Watch has its aficionados, though I’m not one of them. But whatever your relationship with Apple devices, the company has not come up with a technological game changer in years.
That hasn’t prevented its share price from powering upward. For the moment, the stock market remains entranced with what Apple is doing financially, and for understandable reasons. Apple may no longer be a great growth company but it is still extraordinary, said Aswath Damodaran, a New York University finance professor, who has analysed Apple’s earnings closely since 2010. Come what may, he said, Apple churns out staggering quantities of money with metronomic regularity.
“Apple is the greatest corporate cash machine in history,” he said in an interview. “We should appreciate that amazing achievement. The problem is, it’s not growing much. It’s a slow-growth cash-generating machine.”
The world’s most valuable brands
The world’s most valuable brands
1/10 1st - Google
Google replaced Apple as the world’s most valuable brand, with a brand value of $109.5bn, according to Brand Finance
2/10 2nd - Apple
Apple’s brand value declined from $145.9bn to $107.1bn in 2016
3/10 3rd - Amazon
Amazon's brand value rose from $69.6bn to $106.4bn in 2016
4/10 4th - At&t
Of the 40 telecoms brands in the ranking, AT&T in 2016 overtook Verizon as the most valuable brand rising to $87bn from $59.9bn the year before
5/10 5th - Microsoft
Microsoft's brand value rose marginally from $67.3bn to $76.3bn in 2016
6/10 6th - Samsung
Amazon's brand value rose from $58.6bn to $66.2bn
7/10 7th - Verizon
Verizon's brand value inched up from $63.1bn to $65.9bn
8/10 8th - Walmart
Walmart's brand value rose from $53.6bn to $62.5bn
9/10 9th - Facebook
Facebook's brand value increased sharply from $34bn to just shy of $62bn
10/10 10th - ICBC
ICBC saw its brand value rise to $47.8bn from $36.3bn. It was the most valuabe financial brand in the world in 2016 replacing Wells Fargo
Last Tuesday, the company provided fresh details of how great a cash machine it is. In just three months, after expenses and investments and payouts to shareholders, Apple’s colossal pile of cash and marketable securities grew another $10.8bn (£8.3bn), reaching a nearly unfathomable $256.8bn (£198.6bn).
In the scheme of things, how big is that? Consider that $256.8bn is more than the value of every other US company except Microsoft, Alphabet, Facebook, Exxon Mobil, Johnson & Johnson, Berkshire Hathaway and JPMorgan Chase, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Apple has enough cash for an outright purchase of General Electric or Wells Fargo or AT&T, the data shows. There is speculation that Apple will make a major acquisition: Companies like Netflix, Disney, Hulu and Tesla are on analysts’ lists.
But there is little sign right now that Apple intends to dispose of its money that way, in a gigantic acquisition. Instead, the company announced Tuesday that it would expand its program of returning cash to shareholders in the form of dividends and stock buybacks. The numbers here, too, are so immense that they are hard to grasp.
In a conference call with stock analysts, Luca Maestri, Apple’s chief financial officer, said that since 2012, Apple’s buybacks and dividends amounted to $211.2bn (£163.3bn): The buybacks alone total $151bn (£116bn). Without those buybacks, which reduce Apple’s shares and total value, Apple’s market cap might already be as high as $900bn (though without the buybacks, Apple’s stock price would be lower, so such calculations are inherently imprecise).
Furthermore, in the next two years, Maestri said, the company intends “to return $89bn (£68.8bn) to our investors, which represents about 12 per cent of our market cap at the current stock price.”
All of which is to say that if Apple’s cash machine keeps clicking, it could well become the first company with a $1t (£77.3bn) market cap. But it would probably get there much faster if it were not sending so much cash back to investors.
The fact that it is doing so is great for shareholders, Damodaran said. It is displaying commendable discipline, he said, because Apple has had no better use for the money, either internally or with a big acquisition of a less-profitable or money-losing company.
Apple is already investing as much as it can in useful research and development, the company said. “We know how much we need to invest in the business,” Maestri said in the conference call. “We will never under-invest in the business. We’re in a very fortunate position that we generate cash beyond the needs that we have.”
Apple stashes nearly $240bn (£185.6bn) of its cash offshore, out of reach of the IRS. Much of it will presumably return to the United States if the Trump administration lowers corporate tax rates, as it has proposed. Maestri said the company’s current plans for its cash reflect “the current tax legislation in this country, and there’s a lot that still needs to happen there, and we’ll see. Obviously, we will reassess our situation if things change.”
Toni Sacconaghi, an analyst with Bernstein Research, said a favourable tax deal could add another $9 (£7) or so to Apple’s shares, which are trading at about $149 (£115). The expected redesign of the iPhone should also help the stock in the next several months, he said, because “we’ve found that Apple’s share price rises in the three to six months before the new phone comes out.” Apple stock is in that sweet spot now, he said.
Like Damodaran, however, he remains sceptical about Apple’s longer-term growth prospects. “The company is so big that it takes a lot to move the needle for growth,” he said. Apple’s global base of iPhone users is growing ever larger, which implies rising income from music and apps and headphones and the like, and it’s even possible that the company will come up with a new Big Thing in technology. Even if it does not, he said, the share price is still attractive.
Damodaran takes a more gimlet-eyed view. Back in February, when Apple shares were still trading at $130 (£100), he calculated Apple’s value based on metrics like cash flow and declared that the company was “fully deserving of its market value.” But when the stock price reached $140 (£108), he sold his own shares. “It’s still a great company,” he said in an interview. “But I don’t like the price.”
It isn’t a crazy price, not if you expect that Apple will remain disciplined and highly profitable and, maybe, even have another growth spurt next year. But unless the old Apple magic returns, the company right now is not a bargain.