The case for Apple to execute a large stock buyback

“Apple is sitting on a huge cash reserve — $24.5 billion as of September and growing at the rate of $8 to $10 billion a year – that’s doing almost nothing for it,” Philip Elmer-DeWitt writes for Fortune.

MacDailyNews Take: It’s actually providing insulation and flexibility.

Elmer-DeWitt continues, “The money is earning about $1.55% interest after taxes, according to a report issued Wednesday by Bernstein Research’s Toni Sacconaghi, at a time when the company’s stock is trading at a unusually low (for Apple) multiple of 15 times earnings. That makes conditions ideal for a massive buyback of Apple (AAPL) shares, says Sacconaghi.”

“Of course, Steve Jobs may have better ideas than Toni Sacconaghi about what $25 billion can do,” Elmer-DeWitt reports. “The last time Apple’s stock fell this sharply — plunging from nearly $40 a share in March 2000 to $7.44 in December 2000 – Jobs used the cash he had on hand to start a chain of Apple Stores.”

Full article here.

18 Comments

  1. It’s not going to happen. Apple will have a blowout Xmas season and will be back at it’s recent levels on it’s own and since it’s stock price drop is in sympathy with the markets and the economy and nothing to do with fundamentals, there is absolutely no reason to deplete cash reserves on a stock buyback.

  2. Nope! Let investors gamble with their money. The shares will go up again with out Apple throwing money at it.

    Instead: They should buy Tivo and Sony. Then my wishes would come true… A versatile beautiful Apple branded TV with full blown Snow Leopard capabilities via iRemote (iPhone remote) ” width=”19″ height=”19″ alt=”grin” style=”border:0;” /> (You know… surfing the net, chatting with friends via iChat, editing your pictures, writing esays and so forth…)

    Yup! Buy Tivo and Sony. Sell all the bad stof and steal all the good… ” width=”19″ height=”19″ alt=”grin” style=”border:0;” />

  3. Apple doesn’t need any short term gain from buying back stock. Apple is looking long term regarding what to do with its cash reserves. One of the things Jobs will never let Apple do again is be nearly destroyed as what happened in the mid-1980s, and having significant cash reserves will always allow Apple to innovate out of any prolonged slump, or undercut the competition if necessary.

    I also have a feeling that Apple has a big plan for the cash, but that either the timing isn’t right or the technology isn’t ready yet. It may be something that requires significant up front investment, which would cost less if Apple had the cash rather than borrowing the money.

  4. Apple is not competing with M$ and they are still kicking their butt. Apple needs to do absolutely nothing except for what they are doing. I would like to see an Apple TV with DVD/DVR so the next generation of DVD boxes can simply be replaced with one item…an Apple TV.

  5. He even said so much last week. Having this much cash in this kind of economy presents Apple with excellent oportunities for very cheap acquisitions.

    Within the next year, they’ll have bougt something rather big, depleting about half of their war chest. They would want to keep the other half for future surprises.

  6. ” $1.55% ” WTF ? I’m assuming the writer meant 1.55 % interest.
    Apple needs to continue to build a buffer against tough economic times, as well as to build a nest egg for a timely purchase of a company or technology, should the opportunity present itself.
    I trust Steve and Peter Oppenheimer to invest those funds in a safe way until they are needed.

  7. Agree that there are far better things to do than reward short-term AAPL traders. The classic example is Adobe, whose market value has dropped nearly in half recently, and is sitting under $15B market cap. Of course, there are good reasons to NOT buy Adobe; the largest one is that it risks challenging Microsoft directly at the wrong time. Fortunately for Apple there has been talk lately that the Microsoft/Yahoo deal might re-emerge; if Ballmer ever demolishes his flexibilty on such a grand scale I expect Apple to make a dramatic move to take advantage (though not necessarily an Adobe purchase).

  8. A stock buy back for Apple would be the dumbest, most knee-jerk, conventional-Wall-Street-brain-dead-analyst plan anybody could ever conceive of. Sacconaghi has said some stupid and inaccurate things regarding Apple before, but this takes the cake! Either he’s terminally stupid or on the take.

  9. Kudos, Zeke. Toni Sacconaghi was spectacularly wrong in previous analysis about Apple. Stock buybacks are not without their merits, as buybacks reduce the number of shares outstanding, thus raising the per-share value. But these days, buybacks are often a ploy by companies desperate to raise their stock valuation.

    While Apple has been beaten down by the market based on fear and negative concerns for consumer spending, the companies earnings remain very strong. Invariably, a stock’s price will eventually catch up to its valuation. Mind you, the two don’t march in lock-step. But eventually, value catches up to stock price. Those aren’t my words, but the experienced observations of no less than Peter Lynch and Benjamin Graham. (Google or Wikipedia their names if you need the insight.)

    Sacconaghi is typical of the too-self-important know-it-all Wall Street analysts intent on making a quick buck. But in the maelstrom that is the current bear market, and in a likely recession, that LAST thing any company should do is to spend money like a drunken sailor (or Congress). Having cash on hand is the best way to ride out any economic storm. And like others have suggested, Apple is likely to have better ideas for how best to use the asset of almost $15 billion in cash.

    To those who say, “Apple should buy this, or Apple should buy that”, I can only roll my eyes. Why poison the well with a big acquisition of a company that would only damage the corporate culture of Apple? If you look back, Apple has tended to make relatively tiny acquisitions, but they have tended to make huge, strategic returns. Apple has time on its hands, and there’s no deadline on what to do, or NOT to do with its cash. Doing the right thing, whether it’s not spending the money at all, investing in R&D;, using it to hire outstanding talent, or giving it all to me (which I highly recommend, by the way), is what matters.

    Just because you have money doesn’t mean you have to spend it. That’s something Toni Sacconaghi will never understand. As my dear departed father once said, “Those who can, do. Those who can’t become politicians. And those who can’t do that become Wall Street analysts.”

  10. What Mr Sacconaghi does not seem to understand is that Apple is a long range thinking company. We saw that kind of short term thinking with Dell’s rise to a pinnacle, flame out and then fall from grace. Michael Dell when he made his famous comment offered no long range planning, just a series of short term goals without any customer value added. This is what Apple is all about, providing customers with value for their dollars. The fact that their operating system and software offerings just work offers tremendous value in productivity, the fact that they use premium components offer low cost of ownership. The fact that the operating system is secure mitigates the need anti-virus offerings saves customers hundreds of dollars in unnecessary costs. All of their product lines provide exceptional value. The point here is, do long range thinking in providing valuable products and increase your company’s value providing value for your share holders. Buying back shares is short term smoke and mirrors. In this economy such a buy back won’t change the law of supply and demand, the state of the current economy, or the minds of the market mentality that chose to punish Apple more than it’s contemporaries. Last year when Apple hit $200 all these analyst were grousing about whether Apple would declare a stock split. A hundred dollars less in value and they want a buy back. As a share holder I say Steve stay the course whatever you’re doing because 95% of these analyst have proven themselves fools for opening their mouths.

  11. Analysts are idiots. It’s largely this disdain for sound, cash-based reasoning that has led to the current market plunge. “Apple’s got cash?! How stupid! They should spend it and operate the company on a line of credit!”

  12. Apple has the cash because they are doing things right. When was the last time any of these analysts were the CEO of a company sitting on top of $25 billion in cash and $0 debt. Analysts are not thinking about the next great innovation. All they think about is increasing a stock price by a few % points in the short term.

    “How can you keep selling sugar water to kids when I am offering you a chance to change the world.” Steve Jobs to John Sculley

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