In case you haven't heard, Apple (NASDAQ:AAPL) has $137 billion in cash on its books and investors are dying to get their hands on it. They've lost faith in the King of Cupertino to make sound investment decisions and are beginning to fear that those riches may never see the light of day. Not helping matters is the 32% decline Apple shares have seen from their all-time high set back in September. This decline helped spark a passionate debate among investors for Apple to take action and return more of its cash to shareholders.
Billionaire hedge fund manager David Einhorn of Greenlight Capital believes that Apple can "unlock" value by issuing perpetual preferred shares in increments of $50 billion with a yield of 4%. For each $50 billion in issuance, he expects Apple's common share price to rise by $32 – or about 7% at current levels. Although this approach may lead to a price increase, it doesn't actually create any value for shareholders. According to valuation theorist Aswath Damodaran, value is only created when cash flows are increased from existing assets, cash flows become less risky, tax benefits improve, or when a company grows more efficiently.
Kill the PC
Well, this is obviously easier said than done. During Apple's most recent conference call, CEO Tim Cook talked about the iPad being "the mother of all opportunities" because the PC-Windows market dwarfs the Mac market, and thanks to widespread rates of adoption, Tim Cook expects the tablet market will one day surpass PC market. Considering the iPad commanded over 43% of the tablet market at the close of 2012, it puts the iPad in a strong position for future growth. Apple could begin pursuing casual PC users more aggressively, which I could easily see translating into more iPad sales.
Not only has Apple given the world free access to a wealth of knowledge through iTunes U, it's provided a 21st century learning platform for educators, which students can access on an iPad. Earlier this month, Apple's vice president of education, John Couch, met with the president of Turkey over the potential for Apple to supply 15 million Turkish students with iPads. With the deal valued to be worth $4.5 billion, it drives home the growth potential of the iPad within the scope of education.
Sustain its market share
According to IDC, Apple is forecast to sustain its market share in both tablets and smartphones between now and 2016. Being that the smartphone and tablet industries are expected to grow at an annual rate of 18% and 23%, respectively, Apple must continue to grow its volumes roughly in line these rates. Should this be the case, it will mean that Apple went from selling 201.5 million iPhones and iPads to selling over 343 million in three years' time, representing a 71% overall increase in volume.
However, iPhone growth may have to come from a lower-cost phone, violating Damodaran's value creation rule of increasing cash flow from an existing asset. Technically, a new iPhone shouldn't be considered as an existing asset, but neither was the iPad Mini, which helped fuel a 48% year-over-year increase in unit growth last quarter. I'll let this slide as long as it allows Apple to deliver strong enough unit growth to maintain its iPhone market share and it's seen increasing cash flow.
Patience is key
Value isn't something that's typically created overnight. It's going to take time for the market to acknowledge that Apple probably isn't that high-flying growth investment investors expect it to be. In terms of creating value, Apple doesn't have to reinvent the wheel in order to be successful over the long term. With the right focus and creativity, Apple can seemingly create new growth opportunities out of its existing product lines. As an investor, would you be pleased with this value-creating approach?