Shareholder Equity and Cash,
Dell vs. Apple

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By Plato90s
April 22, 2003

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In a recent series of post by jonkai, it was pointed out that Dell doesn't have shareholder equity or book value reflecting its position as the #1 computer maker in the world. By comparison, Apple has built up a lot of equity, with intrinsic value comparable to Dell ($4.1B vs. $4.9B).

That's a deceptive view, however, because it doesn't take into account 2 factors. One is the degree of shareholder dilution, and the other is the enterprise value of the company.

(Note: all quarter and year references are fiscal, not calendar, and unique to each company. all share counts are for fully diluted)

Apple increased its book value on the order of $3B from the nadir of 1998 by pursuing massive shareholder dilution. Outstanding shares increased by nearly 40% from 1998 to 2000, the height of Apple's book value. Apple built its equity at the cost of selling large chunks of itself to employees and companies like Microsoft.

By comparison, Dell has actually held its outstanding share count steady in the 2.6B - 2.8B shares level for the last 5 years. At the same time, its book value has increased from $1.4B in Q1 of 1999 to $4.9B at the end of 2003. If Dell had pursued the same strategy as Apple, ignoring shareholder dilution, then its book value would be far greater today.

As it is, Dell has accomplished a superior balance, IMO, by increasing book value by 250% in 5 years while holding dilution steady. Apple got the same 250% increase, but did it with a 40% dilution of shareholders.

The other half of the equation is the enterprise value of the company. Over the last 8 full quarters, Apple generated operational income of $60M. At the same time, its interest/investment income is $219M. This proves out the point that Apple is primarily profitable through cash, and that its enterprise value is extremely low. Generating $60M of profit from $11.6B in revenue is rightly considered to be under-performing.

By comparison, Dell generates billions in operating income every year. jonkai has correctly pointed out that Dell spends almost all of that income to purchase its own share, which is the only reason dilution on a massive scale has not hit Dell.

The big difference to focus on is the ability of management to change the situation.

Dell has the ability to abandon dilution control at any point and focus its operating profit to building book value. It can double its shareholder equity in about 9 quarters, at current cash flow levels. An all-cash war chest of impressive size is always at the fingertip of Dell's management.

Apple doesn't have the ability to instantly increase its operating profit to a level comparable with Dell. The book value Apple has is about as high as Apple will have, unless it was willing to dump even more shares. Apple can't realistically double its book value the way Dell can, because it has such a low enterprise value.

To paraphrase Sun Tzu

"The wise general depends not on the weakness of his enemies, but on his own strength."

Dell has control of its own fate, to go in any direction they want. Apple is locked into the existing course because of its own weakness.

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