- Apple stock fell 5% despite the best quarterly earnings in any company's history.
- Traders are concerned about stalling sales for the iPhone, iPad and Mac lines.
- Apple has $221 billion in cash to address these problems. How much is that?
Apple (NASDAQ:AAPL) earnings disappointed, despite being the best any company has ever delivered, ever. Net income of $18.4 billion on revenue of $75.9 billion means nearly one dollar in every four fell to the net income line. Walmart (NYSE:WMT) may deliver more revenue, and Gilead Sciences (NASDAQ:GILD) may bring more of its revenue to the bottom line, but no company has ever combined them like this.
Yet Apple stock fell, and in the short run there is a reason for that. Sales of the flagship iPhone are slowing. No single product has ever delivered results like the iPhone has, and that success will be hard to replicate. The only comparison TV analyst Jim Cramer could come up with that made sense to him was Pfizer (NYSE:PFE), which fell as patents on its flagship Lipitor drug expired. But Apple doesn’t face that problem. At its worst, the problem is moving the needle, putting the money it has made to profitable use.
The result represented a good fisking of the view that fast-growing companies like Facebook (NASDAQ:FB) or Amazon (NASDAQ:AMZN) should be handing money to shareholders if they want to be taken seriously. CEO Tim Cook has done everything Wall Street wanted – split the stock, initiate a dividend, buy back shares, provide transparency – yet Apple stock price is 30% below its record highs.
Is it time for growth investors to move along and leave Apple stock to the widows and orphans? Maybe, over the next few months, that makes sense. Seen over a year or three, you would be a fool to do so.
Consider. Right now Apple could buy IBM (NYSE:IBM) for cash. Such a deal would increase revenues by one-third, and while IBM only brings 16% of revenue to the bottom line, the combined margins would come in at around 22% on annual revenues approaching $400 billion. IBM would deliver a cloud strategy, enterprise cachet, and literally hundreds of thousands of talented software engineers around the world.
I am not recommending this. It’s just that $221 billion in cash that Apple has, as Cook said on January 26, is a lot of dosh, even in the high-dollar technology space. Bid $150 billion, make part of that payment stock, and life gets very interesting for companies like Microsoft (NASDAQ:MSFT) and Amazon that are now sweeping the enterprise space.
Apple does not consider itself an enterprise technology company, however. It considers itself a product company. That’s why the focus of most analysts is on things like the Apple Watch, Apple TV, and the possibility of an Apple car, which will cost money long before they deliver significant revenue – significant in terms of the current $300 billion sales run rate.
The slowdown in Macintosh sales, with just 5.7 million sold during the quarter, indicates that the company is having trouble making inroads into enterprise markets, despite its current alliance with IBM. Apple is seen by enterprises as a consumer products company, and most Mac sales still go either to individuals or departments.
If Cook wants to solve that problem there are solutions at hand. Amazon stretched its resources to put $1 billion/quarter into its Amazon Web Services cloud. For Cook, that’s like spending a quarter. He holds off because the revenue rate, placed against that capex, doesn’t look great next to the businesses he has. In fact, he may feel that way about the entire enterprise market.
So Apple faces a choice. Does it keep creating new product categories, which leads to uncertainty and is hitting the Apple stock price hard today, or does it buy its way into the enterprise space, which it can do in any of a variety of ways.
While waiting for that answer you can pick up Apple stock right now and get an ultra-safe dividend that beats the U.S. 10-year bond, a PE ratio of around 7 when you take out the cash, and Cook’s promise that something will, in time, be done. In the current risk/reward environment that is a pretty good gamble for a long-term investor.