In the days and weeks leading up to Apple Inc.'s (NASDAQ:AAPL) financial report, two topics dominated investor discussions about the company. The first was the slowing growth of Apple's flagship iPhone and whether there will be a "super-cycle" of growth. The second is whether Apple should use its monolithic war chest to make a massive acquisition in response to the aforementioned slowing iPhone growth.
Apple CEO Tim Cook even fueled the fire when he revealed during Apple's January earnings conference call that the company's services business had its best quarter ever and that the company's goal was to double that business within the next four years. While suggestions and theories abound, noted valuation expert Aswath Damodaran, a professor of corporate finance and valuation at New York University's Stern School of Business, has advice on what Apple should do concerning its excessive war chest and slowing iPhone growth: "probably nothing."
Greatest corporate cash machine in history
In an interview, Damodaran, an oft-quoted expert on the financial-media circuit, pointed out that "the recognition has to come that this is a cash machine in a slowing market business." This is a popular refrain from his blog. In summarizing his conclusions on the company over the past five years, he stated, "Apple was one of the great cash machines of all time, [and] its days of disruption were behind it ... mostly because of its size; it is so much more difficult for a $600 billion company to create a significant enough disruption to change the trend lines on earnings, cash flows, and value." He also believes that thesis is still intact.
Damodaran believes Apple is better off sticking with its current business model and cash pile and has been disciplined in its capital deployment, given the restraints resulting from U.S. tax policy and the cost of repatriating its overseas coffers.
Wall Street matchmakers
There have been numerous theories advanced in recent months and years concerning a megamerger between Apple and a variety of highly recognizable companies. Amit Daryanani, an analyst with RBC Capital Markets, proposed that the marriage of Apple and The Walt Disney Company (NYSE:DIS) would benefit both companies because of the convergence of technology and entertainment. It should be noted that he assigned a "greater than 0% probability" of the potential liaison, which doesn't represent a very high level of confidence.
Investors have suggested a pair-up involving streaming pioneer Netflix, Inc. (NASDAQ:NFLX), which could immediately bulk up Apple's services by way of monthly subscriber revenue. The company's 100 million subscribers generated $8.3 billion from streaming subscriptions in 2016, and the company is hard at work penetrating recently launched international markets. Another oft-suggested coupling has Apple realizing its iCar aspirations by buying electric-auto maker Tesla, Inc.
While these Wall Street fantasies may come with a certain appeal, Damodaran insists that Apple has done well to ignore calls for these Hollywood-esque combinations and notes that cash isn't the problem. "It's what they could do with the cash that could potentially be a problem," Damodaran said. "It can become a problem if people stop trusting management, and you know what could cause people to stop trusting management? A big acquisition."
Apple announced this week that it would raise its dividend by 10.5% to $0.63 per share and increase its share-repurchase authorization to $210 billion. The company has returned over $211 billion to shareholders since August 2012, including $151 billion in share repurchases. I would rather see Apple continue to return capital to shareholders than pursue some storybook romance that could end in a rocky divorce.
Danny Vena owns shares of Apple, Netflix, TSLA, and Walt Disney. Danny Vena has the following options: long January 2018 $80 calls on Walt Disney and short July 2017 $115 calls on Walt Disney. The Motley Fool owns shares of and recommends Apple, Netflix, TSLA, and Walt Disney. The Motley Fool has a disclosure policy.