Fresh speculations surrounding the possibility of Apple (
AAPL
) returning more cash back to shareholders have emerged recently,
infusing the company's battered stock with some life. Apple's
shares rose almost 4% over the past couple of days after the
company issued a statement Thursday, seeking to clarify David
Einhorn's allegations about a proposed elimination of
preferred stock from its charter. The company said that the
proposal, which is up for vote at a shareholder meeting February
27, doesn't preclude the issuance of preferred stock in the future
but merely requires shareholder approval to do so. Further, Apple
added that its management has been in active discussions on ways to
increase capital allocation to shareholders.
See our complete analysis for Apple stock here
That last bit brought some amount of optimism back as the raging
debate over cash allocation reminded investors of the huge $137
billion cash hoard that Apple has piled on its balance sheet. With
the company generating over $50 billion in cash annually, there is
a huge possibility of Apple announcing an even bigger dividend or a
stock buyback scheme in the future. However, Einhorn believes
that the most rewarding would be issuing preferred stock to
shareholders and has already forwarded a proposal to Apple seeking
the issuance of preferred stock with a perpetual 4% dividend. While
it would indeed serve as a near-term catalyst to the stock if Apple
starts returning more cash to shareholders through whatever means
it deems fit, we see the same as having little impact on the
company fundamentally. Moreover, the cash allocation would be
limited by the fact that Apple has a majority of its cash overseas,
repatriating which would lead to tax concerns.
We maintain
our
$650 price estimate for Apple's stock
, about 35% ahead of the current market price.
Emerging market strategy required
How Apple could improve its fundamentals is by coming up with a
better strategy for the emerging markets where the iPhone is way
too overpriced to make any meaningful dent in the
market. Android smartphones are already breaking the price
barriers at the low-end, infiltrating emerging markets such as
China where Apple doesn't yet have a deal with the largest carrier,
China Mobile. Considering that 3G penetration in China is about 20%
currently, despite which it has already become the biggest
smartphone market in the world, Apple will miss out on a huge
growth opportunity if it doesn't find a way to mitigate China
Mobile's subsidy concerns. We are however optimistic that such a
deal will happen in the future and believe that this could be the
next big catalyst for Apple's stock. (see
Apple's China Potential Could Be Limited By A
Subsidy Compromise With China Mobile
and Apple Could Have A $750 Fair Value If China Mobile Deal
Works Out)
In order to benefit more from the China potential, it may
behoove Apple to consider a cheaper iPhone for the emerging markets
that does not compromise much on the build quality and margins, in
a move similar to the iPad mini. This will also help lower the per
phone subsidy costs and potentially help bring China Mobile on
board. Such a move would also undoubtedly translate well to other
developing markets that may want Apple's iPhones but may find the
subsidy costs and retail price tag too high. (see Apple Needs
A Better Emerging Markets Strategy)
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