Apple CEO Tim Cook. Source: Apple.
Apple (AAPL 0.64%) recently booked another wonderful quarter that should leave investors pleased with the company's performance and direction. As one of the most owned, followed, and prognosticated-about companies on Earth, we all know a lot about Apple. But after listening to the earnings conference call from Oct. 27, I have three questions I'd like to ask CEO Tim Cook about Apple and its future.
What more should Apple be doing in emerging markets?
Apple has done an excellent job expanding its reach into emerging markets, with China as the focal point. Its combination of brand power, logistical expertise, and financing is unmatched in the business world, and Apple has used this advantage to deliver staggering revenue growth rates in the Middle Kingdom. FY 2015 results included total revenue of $234 billion, with $79 million of that coming from emerging markets. Q4 2015 revenue from China was up 99% compared with Q4 2014.
Apple Store in Pudong Shanghai. Source: Apple.
Apple is doing a lot of things right when it comes to China, but in the conference call, Cook said:
If you look back five years, China's middle class had about 50 million people, and if you look ahead five years, it will have 10 times that number in it. And I feel like we are reasonably well positioned in China. I'm sure we can do better, but I think we are doing fairly well there.
I would like the Apple chief to offer a bit more color about what he thinks should be changed or improved upon. In five years, the Chinese middle class could consist of half a billion consumers. Perhaps China should be even more of a focus for Apple than it already is.
Is it time to modify the capital-allocation plan?
The scale of Apple's capital-allocation plan over the past few years has been unprecedented. The company has completed $143 billion of its authorized $200 billion capital-return program. The success of this program is easily illustrated in two ways. First is the drastic reduction in share count since 2013.
Second is looking at the real impact this reduction has had on EPS growth. Year-over-year quarterly earnings were up around 30%, while EPS over that same period was up around 38%. EPS is what matters to the individual investor, and this 8-point delta is the real effect of share buybacks.
All of that said, I wonder if the company should increase its dividend at a more rapid pace than it has been. In the past quarter, $3 billion was spent on dividends and $14 billion on buybacks. While I agree that the shares are undervalued and understand the beneficial tax treatment of buybacks compared with dividends, I wonder if the mix should be balanced out a bit more. Investors who wish to acquire more shares can reinvest their dividends, while others seeking income now might be drawn to invest. A yield in the 3%-4% range would surely draw a broader base of investors than the current sub-2% payout will.
Is it time to make a big acquisitive splash?
In the past fiscal year, according to Cook, Apple "completed 15 acquisitions to enhance and accelerate our roadmap for products and services." Nearly any acquisition will be relatively small when the acquiring company sports a market cap north of $600 billion, but Apple is famous for not splurging on big-ticket items. Its $3 billion-plus acquisition of Beats in 2014 remains the largest purchase in the company's history.
Beats headphones and a Macbook. Source: Apple.
It's hard to argue with Apple's blueprint to date. It buys companies for talented engineers or a specific piece of technology that can then be integrated into existing or new products. Spending $500 million for something that can make the iPhone 2% better is a great buy. Apple has become the world's most valuable publicly traded company using this method, but I think it might be time to explore a large acquisition.
The "largeness" of this is, of course, relative. Twitter at around $20 billion would be a large purchase for many companies but a drop in the bucket for Apple. Netflix at around $45 billion would be stretching the piggy bank a little further, and Disney at nearly $200 billion would be an "all-in" type of gamble on the future of media content and consumption. Apple would of course need to pay a premium to all of these figures. One other interesting possibility would be GoPro, which currently has a market cap under $4 billion and would be a similar type of purchase to the Beats acquisition. These are random suggestions, but the right acquisition could be a jolt for Apple and prospective investors.
I'm happy with how things are going
It's hard to find fault with Cook's performance since he took over the top job. Apple trades at a compelling valuation, seems to have a shareholder-friendly capital-allocation plan, and continues to grow both the top and bottom lines. The company isn't standing still and answers to these three questions would give investors a better view of what's on the horizon for this company.
