Apple's Losing Its Core

Last week, I noted Apple's (Nasdaq: AAPL  ) incredible recent stock run and decided it was a bit too incredible; I removed my long-standing "outperform" rating on the tech giant in Motley Fool CAPS. Now, on the heels of today's big divi dend and buyback news, I'm going a step further and making an "underperform" CAPScall on Apple.

Today's buzz shows that traditional investors and Wall Street analysts are excited about this planned use of cash, but in reality, Apple's just taking a lumbering (that cash is heavy, after all) step toward impending banality.

The bad side of buybacks
Granted, I can't blame longtime shareholders for being happy that Apple will finally return at least some of its huge cash pile to them through dividends. It's the buyback that makes me nervous.

How many companies have made disastrous buybacks at their stocks' highs? Managements may indicate that their shares are undervalued at the time (and some of them may even believe it), but it doesn't always pan out that way over the long term.

My colleague Morgan Housel outlined the danger of buybacks last year, pointing out the tendency to waste shareholder money.

Sears Holdings (Nasdaq: SHLD  ) offers a great example of a company that has squandered shareholder money on share buybacks over the years. In fiscal 2007, it shelled out $2.9 billion on 21.7 million shares at a price of $135. It's currently trading at about $80. For years, the company has used billions in this manner; and even in the cases when it's bought shares at lower prices than today's, let's face it -- Sears is still broken.

More recently, longtime Fool Rich Smith pointed to American Capital and Flowserve as two companies wasting money through buybacks. Seriously, buybacks deserve more than a little bit of shareholder scrutiny.

What happened to "think different," Apple?
Granted, not only is Apple not broke, but it isn't exactly broken, either. I'll grant it's currently a very strong corporate entity in many ways. Its cash and hefty sales of wildly popular products give it security against difficult times. Its products are beautifully designed and well loved. Its current PEG ratio of 0.70 looks insanely cheap.

However, whether today's price really is cheap depends on Apple's ability to continue to be a market leader over the long haul; can it continue to innovate as it did under Steve Jobs? Can it fend off major rivals such as Google (Nasdaq: GOOG  ) and Amazon.com (Nasdaq: AMZN  ) , whose products and services absolutely pose risks to Apple? Do analysts expect too much from Apple at this point?

The loss of Steve Jobs strikes me as a looming and serious problem for this company. Jobs apparently had many dark personal issues (Walter Isaacson's biography includes many revelations into the makeup of the man), but he also possessed an element that's extremely difficult to replace: true vision and the ability to understand what people want out of technology, before they're even aware of it.

I would have liked to see Apple do something more transformative -- indeed, world-changing -- with its cash collection right now. How about a visionary approach to a shared future, like dreaming up ways to bring more manufacturing back to the United States, perhaps, or creating innovative programs to ensure more scientific and technological know-how in our own students here at home? The U.S. lags many other countries in this area, and these skills are essential for a company like Apple (and our own nation's well-being) over the long term.

In other words, perhaps Apple could have made an investment in a future that transcends "business as usual" and matters to all of us instead of this short-term-oriented plan to simply pay billions to buy back a bunch of its own stock.

That's so Wall Street
Apple's move is bland and way too pleasing to the Wall Street mindset. I believe it's indicative of impending banality, and it flies in the face of the notion that Apple can continue to be a truly incredible, amazing company. That's why I'm putting my "underperform" call on the record and giving Apple the red thumbs down in CAPS. You can track my record here. And you can see some of my colleagues' thoughts here, here and here.

Alyce Lomax owns no shares of any of the companies mentioned. The Motley Fool owns shares of Google, Apple, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com, Google, and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 19, 2012, at 6:56 PM, makelvin wrote:

    "...It's the buyback that makes me nervous..."

    I don't think you need to be too worry about the buyback. During the announcement, the $10 billion buyback was mainly for compensating for their own company stock grants and options and preventing the dilution of the stocks. They made it clear that the stock repurchase is meant as an attempt to increasing the shareholder value.

  • Report this Comment On March 19, 2012, at 6:57 PM, makelvin wrote:

    Oops... I meant that the stock repurchase is NOT meant as an attempt to increase the shareholder value in my earlier post.

  • Report this Comment On March 19, 2012, at 7:08 PM, midnightmoney wrote:

    I like the word banality cause of how it sounds. The concept of impending banality is too rich for words, though the upcoming presidential election might be a better place to watch it play out than in apple's share price. Personally couldn't give a hoot about their products.

    ba·nal·i·ty   [buh-nal-i-tee, bey-] Show IPA

    noun, plural ba·nal·i·ties.

    1.

    the condition or quality of being banal, or devoid of freshness or originality: the banality of everyday life.

    2.

    an instance of this: We sat around the dinner table exchanging banalities.

    Word Origin & History

    banal

    "trite, commonplace," 1840, from Fr. banal, adj., "belonging to a manor, common, hackneyed, commonplace," from O.Fr. banel "communal" (13c.), from ban "decree; legal control; announcement; authorization; payment for use of a communal oven, mill, etc." (see ban (v.)). The modern

    sense evolved from the word's use in designating things like ovens or mills that belonged to feudal serfs, or else compulsory military service; in either case it was generalized in French through "open to everyone" to "commonplace, ordinary," to "trite, petty."

  • Report this Comment On March 19, 2012, at 7:09 PM, steltek wrote:

    I'm with you, but to be honest, I think your call is too early. Apple will peak in a few years, when its products reach global saturation. The first sign of the downward momentum will be when former Apple iconoclasts latch on to a new "elite" designer device manufacturer. Apple's products are status symbols, especially in developing economies. It's going to take years, maybe even a decade, for that mentality to become passe. But you are right; every rule breaker company that has lost its visionary also eventually lost its edge. A COO can steward a plan out in a linear fashion, but will he know when to change course, when competition demands it? The next paradigm shift in tech will be interesting.

  • Report this Comment On March 19, 2012, at 7:24 PM, sharpx2 wrote:

    Methinks you worry too much. I think there is an example of what can happen when a company moves from being led by a genius/entrepreneur to one led by technocrats, albeit creative and imaginative ones, and that is Disney. Granted, this company has had its ups and downs, but the overarching narrative is one of enormous success. Why? First, the original vision of the founder was incorporated into the company's mission and DNA, so the things that grew the enterprise in the first place were made fundamental to its continuance. Second, the imaginative leaders never stopped thinking of new ways to both remerchandise the existing franchise, and extend the brand into related industries (broadcasting, toys and even a cruise line as just a few examples.)

    Without belaboring the point, there is nothing to prevent Apple from continuing to grow. There is a method to their product development, and the pipeline extends out five years. It is not like they get to the end of five years and say, "Now what do we do?" They are continuously inventing the future, adding another year as each year expires. That's a great piece of DNA. And for me, it is not hard to see that they've gathered a core of incredible intelligence that should have enough brain power to continue along the arc defined by Jobs.

    As to the dividend and buyback, please note that these can basically be accomplished out of their quarterly profits, without substantively digging into the cash stash. So they may have to revisit this decision down the road, and decide what to do with the next pile of cash that accumulates.

  • Report this Comment On March 19, 2012, at 8:56 PM, drillerjim101 wrote:

    Well said, sharpx2.

    Many a false prophet has advised selling AAPL and that it has finally peaked out. Just today I noticed the incredible lines around the world waiting for their new I pads...whose demand far exceeds I pad 1 and 2. Very very few companies are driven to excellence not only to their products, but more importantly to service to their growing devoted following.

    Hang on to your AAPL and buy more on dips. In 5 years your wallet or retirement will be fatter and happier. Guaranteed.

    James Fregia DDS

  • Report this Comment On March 19, 2012, at 10:08 PM, SpeechRec wrote:

    Alyce, Apple just began a shareholder-friendly dividend, increasing the available buyers for their stock to include dividend-only funds, and they just sold 3,000,000+ iPads on opening weekend (including pre-orders), and you are going to punish your own CAPS rating because they did not (yet) do something philanthropic with MY money?

    I respectfully suggest that you buy as many shares as you possibly can shares and donate your dividends and profits to the charity of your choice, and let me use mine where I determine they are best used.

    Finally, Steve jobs greatest creation was not the iphone or the ipad or any other device you can hold in your hands. It is the company called Apple, and if you think Apple is done innovating and beneficially changing the world more than most philanthropies ever will, hang on to your hat, lady.

    Jason

  • Report this Comment On March 19, 2012, at 10:19 PM, SpeechRec wrote:

    Doctor Jim, I agree: Sink your teeth into more Apple on every dip.

    Now please don't drill my teeth. I will try to brush more (and remineralize my enamel, stimulate my odontoblasts to produce new dentin when necessary, and keep my s. mutans in check so they don't start new carious lesions).

  • Report this Comment On March 20, 2012, at 12:07 AM, peto3 wrote:

    Alyce, you have succeeded in boring me to death with your writing that expresses the same old tiresome, quintessentially banal nonsense ...

  • Report this Comment On March 20, 2012, at 7:50 AM, jdmeck wrote:

    The liberal came out at the end there. Makes me not believe I can trust his opinion.

  • Report this Comment On March 20, 2012, at 8:14 AM, drillerjim101 wrote:

    SpeechRec: "Sink your teeth into more Apple..."

    I love it!

    Gotta love those odontoblasts!

    James Fregia, DDS

  • Report this Comment On March 20, 2012, at 9:19 AM, TMFLomax wrote:

    Thanks for the thoughts, keep them coming. I freely admit I might be wrong (or too early) but we'll be able to track whether my concerns pan out in my CAPS score.

    sharpx2, it's interesting you brought up Disney. Have you read the Isaacson bio of Steve Jobs? You might want to check it out. There is a considerable amount dedicated to the Disney/Pixar history, and how Disney had definitely lost its way for a while there, DNA or no.

    Best,

    Alyce

  • Report this Comment On March 20, 2012, at 12:40 PM, tgnytg wrote:

    Let me see if I have this right.

    With a straight face, you are suggesting that Apple should forego building value for it's investors. A publicly traded company should instead institute little "pet projects" like job creation and education reform. Sort of like a modern day Robin Hood.

    Just because Apple is profitable you feel they should steal from their shareholders to reform Chinese labor law and various liberal fantasies in the USA.

    Why don't you just mail me your paycheck?

    Taking shareholder money and dumping it into such idealistic causes sounds like the beginning of an ugly class action lawsuit for fraud and misuse of shareholder funds. After all, that is what Bernie Madoff did, but the only difference was that his chosen charity was he and his family.

    Consider this: if government agencies were to remove entitlements from their budgets, people would have a vested interest in educating themselves and finding work. The best thing anyone can provide for another is the will to take care of themselves.

    Your opinion that companies should steal from their shareholders and give the money to non-stakeholders is amusing. Why would you work for a company like the Fool who encourages their readers to work, educate themselves, live below their means, and to save and invest?

  • Report this Comment On March 21, 2012, at 11:04 PM, danalexky wrote:

    I refuse to put Alyce down, she says what she believes. I believe differently. If everyone thought the same way it would be a much less entertaining world.

    I think aapl is rocking and will continue to do so. I have given up watching for dips. Better grab it as soon as you can, as much as you can, and hold on.

Add your comment.

DocumentId: 1828680, ~/Articles/ArticleHandler.aspx, 4/21/2014 11:37:26 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement