The Next Decade for Apple Stock
The upside for Apple Inc. (NASDAQ:AAPL) is huge if the company makes proper use of its extensive cash reserves. Using its deep pockets, the company could launch AAPL stock through the roof by handing more value back to shareholders.
Apple stock has barely moved from 12 months ago, edging up a mere 0.88% from its previous level. That’s not what I would expect from the apparent “world’s most valuable company,” especially when it’s sitting on $205 billion in cash. Fortunately, things are about to change.
Apple looks like it’s waking from a deep slumber, rubbing its eyes, and staring around at a completely different landscape. The underlying trends in Silicon Valley have changed and although Apple is late to the party, it has advantages that will help it catch up.
For instance, Apple announced that it is getting into self-driving cars. Alphabet Inc and Tesla Motors, Inc. have been researching driverless technology for a long time and have made significant strides in the field. (Source: “Apple meets California officials to discuss self-driving car,” The Guardian, September 18, 2015.)
Apple is only just starting its foray, but that doesn’t mean it is doomed to failure. The tech giant has the resources and intellectual capital to stop the bleeding before it becomes too noticeable. Here’s the two-step maneuver I see Apple trying to pull off.
Buybacks and Dividends for Confidence in AAPL Stock
The first thing Apple needs to do is satisfy its stockholders. There have been rumblings from powerful investors that AAPL could have a higher return on equity, but management is shying away from doing what is necessary.
That’s never what any executive wants to hear, especially when the chief investor of that pack is Carl Icahn. Icahn is a legendary activist investor who has made billions by strong-arming companies in the direction he thinks is best for them.
Icahn is among many who have been pressuring Apple to increase its dividends and boost buybacks of AAPL stock. In fact, he even formed a political action committee to lobby Congress for a tax holiday that helps Apple bring back cash from overseas accounts at a reduced tax rate, meaning less money lost in the transfer.
With this move, Icahn is attempting to tilt the board in Apple’s favor, giving management little choice but to do his bidding. Yet it seems Apple was already headed in that direction. Since 2012, the company has repurchased $80.0 billion worth of Apple stock and paid more than $32.0 billion in dividends. (Source: “Apple Expands Capital Return Program to $200 Billion,” Apple Inc. web site, April 27, 2015.)
Now the company has committed to lifting the total amount returned to shareholders. It is aiming for a total of $200 billion by the end of 2017, but I doubt that will be enough for Icahn. His stake in Apple entitles him to $900 million of the company’s current cash pile.
So he’ll push Apple for more and it’s likely management will give in for no other reason than that they can afford to. As investors soak up the returns from AAPL stock, they will be more lenient about experimental research, making room for greater innovation.
Keeping up its record of groundbreaking innovation has to be the second stage of Apple’s plan or the company could crumble.
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However, this second step for Apple is the hard part, to innovate. There is no formula for innovation because it requires the right combination of personal genius and company dynamics.
Could the “iPhone” have existed without Steve Jobs or Apple? Would electric cars be a relevant subject today without Elon Musk or Tesla? Both men built their respective companies from the ground up, but the firms quickly grew beyond their immediate control. They had to pass on the culture of innovation.
It’s nearly impossible for an outsider to tell whether or not a company can continue to innovate. All we have is Apple’s past performance, its legacy of success that made a lot of people rich. Judging off that alone, it would be reasonable to pin a $200.00 price target on Apple stock.
When you factor in the two-step plan, even $200.00 for a piece of AAPL stock seems low. I mean, if I can figure out how Apple can win the future, then there’s no way the brilliant minds in Cupertino haven’t thought of the exact same thing and have gotten a start on it already.