Apple Reality Bytes

Assessing the tech company's value and outlook
By Heide B. Malhotra, Epoch Times
May 2, 2013 Updated: May 2, 2013

Rarely a day passes that Apple Inc. is not in the news, with some analysts forecasting a decline in the fortunes of the tech behemoth unless it launches new products, while others suggest temporary weaknesses given an economy that is still struggling to return to full health.

Apple, maker of ever-popular i-devices and i-software—iPhone, iPad, iPod, iMac and iTunes, iOS—saw a steep decline in its stock price from the adjusted closing price of $545.85 on Jan. 2 of this year, to an adjusted closing price of $406.13 by Apr. 23, a 25.6 percent decline, according to Yahoo Finance historical data.

On April 23, Standard & Poor’s (S&P) assigned to Apple Inc. a foreign long-term credit rating of AA+, with a stable outlook. It based its outlook, with others, on the company’s high level of liquidity, and risk profile and profitability, calling it an “industry leader.”

Moody’s Investors Service assigned an Aa1 senior unsecured rating to Apple Inc., as well as a stable outlook. Moody’s didn’t assign a higher rating (Aaa), given that the company operates in a very competitive technological field where new products could make older products obsolete within a short time.

Revitalizing Apple

On March 15, Nomura Equity Research suggested a target price of $490 for shares of Apple (AAPL), despite a closing price of $432.43 the day before.

Nomura predicted that the Galaxy S4 smartphone from Samsung Electronics Co. Ltd., the South Korean multinational conglomerate, could outperform Apple in high-end Asian markets by the end of this year.

On April 24, Nomura cut its target price on Apple shares to $420, despite a closing price of $406.13 on April 23. Nomura analysts suggested that Apple’s change in fortune is driven by gross margin weaknesses and not by product cycle stages, although a new product rollout, expected by the beginning of August, was postponed until September.

Nomura is sticking with its neutral rating, which does not recommend to buy or sell, but suggests that the stock will perform based on the predicted returns of Apple’s financial fundamentals.

The Nomura analysts suggested that Apple’s stock will “remain ‘cheap’ until new products are able to revitalize the growth outlook.”

Despite this outlook, Apple shares increased 8.3 percent from an April 24 closing price of $405.46 to a May 1 closing price of $439.29, on successive days of above-average trading volume. Analysts are now debating whether Apple’s moves to return value to shareholders have put a floor under the stock price or if it will retest the recent lows.

Secretive to a Fault

“We believe that the highly secretive Apple is on its way toward becoming more open over the next year—and could start to give a bit more incremental information to investors [so they] get a better idea of the company’s direction,” suggests an April 16, Barclays PLC research report.

To regain investor confidence, Apple needs to make some unexpected strategic moves. Yes, this includes an increase in the dividends the company pays its investors. But, more importantly, the company should take a risk with some of the money it has been hoarding and buy some companies, with some panning out and some not, suggests an article on the Wired website.

“You’re sitting on $150 billion in cash, spend some of it. … Signaling that Apple is prepared to make some big moves and buy some companies of substance would get the investor juices flowing,” states the Wired article, suggesting that Web applications would be an excellent addition, as Apple has problems with this type of technology.

A Dec. 13, 2012 article on the Business Insider website suggests that Apple is not sitting on its hind legs waiting for things to happen but spending billions on undisclosed projects. From $1 billion on property and plants in the second quarter of 2011, the company increased its spending to over $3 billion by the end of the first quarter of 2012 and could spend over $4 billion in 2013.

The Business Insider article cites Apple analyst Horace Dediu, “The capital is being deployed almost silently and, though vast in scale, barely gets a mention from analysts … Not even a single question has been raised at any earnings call about this spending.”

Loosening the Purse Strings

Apple’s board of directors empowered its accounting division to pay out $30 billion in dividends and share by-backs annually from August 2012 through December 2015, disbursing $100 billion to its shareholders, according to an April 23 announcement published on Apple’s website.

At the same time, in order to pay the dividends, the company has just taken on debt through its $17 billion bond offering on April 30, instead of reducing its significant cash and securities holdings.

Much of Apple’s cash is currently held overseas, and analysts suggest that Apple is waiting for a U.S. repatriation tax holiday before bringing some of that cash home—a smart move considering the company was able to borrow at ultra-low rates of 2.415 percent on its 10-year bonds and 3.883 percent on its 30-year bonds.

The company’s short-term cash and cash equivalents, as well as short- and long-term marketable securities totaled $145 billion, according to its U.S. Securities and Exchange Commission (SEC) Form 10-Q filed April 24, representing Apple’s second quarter 2013 financial information.

The company also listed noncurrent liabilities that were not defined, no interest expenses, and financing activities that were paid for with the company’s cash, an indication that Apple had not been borrowing in the market before now, avoiding exposure to the credit market woes of recent years.

Missed Opportunities

“Apple has simply missed the opportunity to gain valuable alliances in government, academia and corporate America unfortunately,” suggests an April 19 article on the Hill’s Congress Blog.

The article suggests that Apple was averse to granting special discounts, unlike Dell Inc. and Microsoft Corp.

For example, in 2010, Android smartphones were not the preferred product for corporate purchasing departments. But, by 2012, because of excellent sales techniques, Android smartphones had made inroads and achieved a 34 percent adoption rate.

According to market analysts, the Android smartphone is the preferred phone in the business world, although the iPhone is superior to the Android. Apple needs not only to come up with new products, but also to improve its sales techniques to compete with the likes of Samsung.