Carl Icahn is the quintessential one percenter. He's wealthy beyond imagination and his words can literally move markets. They did so yesterday when he announced he had taken a "large position" in
The mountain of money
Apple's cash hoard remains absurd at nearly $147 billion even though the company has embarked on a record share buyback and is paying a solid dividend. While profit growth has hit a wall at Apple -- at least for the moment -- the company still generates billions every quarter and so the cash balance is growing. The stock price, however, remains well off its all-time highs even with the boost news about Icahn's investment has given it. Fundamentally, the reason for that is investors question whether the company will continue to be a strong profit generator in the future. Apple trades about 8 times 2013 earnings when the cash balance is excluded, well below the average company.
Share buybacks are fundamentally no way to change the perception that has the company sitting at such a low multiple. Instead, they'll accentuate the perception of a company that has lost its innovative edge. While the math of retiring more stock will doubtless increase short-term earnings per share, as always, a buyback cannot increase actual earnings. But Apple does have too much cash sitting around, as this blog has discussed before.
There remains some strange logic that the share buyback is the best thing to spend the money on because it represents "faith in the company" or some convoluted ideal. But that simply isn't the way buybacks work.
Quo vadis? Where is Apple going?
If Apple wishes to follow Microsoft down a path of sideways stock prices and long, slow decline, it should by all means continue to spend its fortune on buying back shares. If it wants to maintain Wall Street's perception that the innovation edge is gone, it should keep incrementally improving the iPad and iPhone once a year with minimal tweaks and try to extract maximum profit from them. This will generate billions more before the music stops. It will likely briefly perk the stock price up a bit, though it's unlikely to send it back to the all-time high.
On the other hand, there exists a different path. One that shows the company is pursuing a strategy for making money through the decade and even beyond. There is some evidence the company is beginning to head down that path although there are very real concerns about its commitment and speed. More on this tomorrow. In the meantime, Tim Cook needs to stop talking to Carl Icahn.
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