Owning Apple More Profitable than Owning AAPL
As I was commenting on the Verge's story on AAPL's current market cap, I realized something. Owning Apple outright would be far more valuable to me than owning AAPL. In fact, given the current direction of the stock price, I would much rather own the entirety of Apple than own a share of the stock. Owning a share of the stock is like owning some alternate-universe version of the company that is failing faster than Blackberry.
Here is what I mean.... If somebody came to me and said that they would sell me a cash-printing machine that was completely legal and would cost $400. The machine would print $48 this year and $6 more each year for the next 5 years and eventually level out at $72 per year. The machine would be guaranteed to not fail for 10 years. I would quickly do the math and get:
2017 - 2022: $72
Adding that up, I would get $660. So basically, my investment of $400 would yield $660 in ten years. The machine could last longer than that and could indeed keep making me money, but nobody knows the future. If somebody offered to sell me that machine, then the first thing I would ask is "can I buy multiple machines?". Obviously, the more you buy, the more money you make.
Now let's look at Apple's share price. The share price is fast-approaching $400 and the market cap has dipped below $400B. The company however is projected to increase profits by 71% in three to five years time, which works out to an increase of $6B per year over the next five years (assuming it takes five years to get there). Nobody is making any projections further out than that, but figuring it as $6B increase per year would essentially amount to some growth each year, but a decreasing percentage of growth year-over-year (which makes sense as markets saturate).
I assume that a company earning $72B per year in 2017 is not going to go bankrupt the following year. Let's assume that Apple suddenly goes "flat" and only earns the same profit each year for the next five years. That would be a pretty dismal scenario for them. Even if that were to occur, Apple would earn $300B in the next five years to add to their existing coffers of $137B for a total of $437B.
Take note of that $437B number since it is $42B more than AAPL's current market cap of $395B. $42B being the amount of money Apple earned in 2012 and enough money (according to Kara Swisher at AllThingsD.com) to buy:
Twitter ($10 billion), LinkedIn ($18.32 billion), Yelp ($1.47 billion), AOL ($2.81 billion), Pandora ($2.09 billion), Zynga ($2.69 billion), OpenTable ($1.32 billion) and, finally, Pinterest ($2.5 billion).
Of course an Apple that decided to go private and no longer be "AAPL" could just keep $42B in the bank and have bigger coffers than most of their current competitors.
That brings me back to my cash-printing machine analogy. I would like to own as many of those $400 cash-printing machines that I could buy. If the cash-printing machines were not for sale, but were owned by a company who had 1 BILLION of them as their only asset and that company sold shares on the stock market to allow you to own a piece of that cash-printing business then I would want to own as many shares of that company as I could. However, Apple is that business that essentially owns a BILLION cash-printing machines that have been printing cash and are easily going to keep printing cash for the next five to ten years. Yet, investors are turning their noses up to owning AAPL shares. Nobody wants a piece of the cash that Apple is going to print.
So what should Apple do? Apple should probably do exactly what Warren Buffet says (my emphasis):
I would run the business in such a manner as to create the most value over the next five to ten years. You can’t run a business to push the stock price up on a daily basis. Berkshire has gone down 50% four times in its history. When that happens, if you’ve got money you buy it. You just keep working on building the value. I heard form people each time [Berkshire shares went down], saying why don’t you do this or that. Pay a dividend. I think Apple’s done a good job of building value. They may have too much cash. Now one reason they have so much cash is two thirds of it has not yet been taxed. When Steve [Jobs] called me, I said, Is your stock cheap? He said, yes. I said, Do you have more cash than you need? He said, a little. [laughs] I said, then buy back your stock. He didn’t. Now, when our stock went from $90,000 to $40,000 to $45,000, I wrote about, we wanted to buy the stock. We didn’t quite manage to. But if you could buy dollar bills for 80 cents, it’s a very good thing to do.