I've been called an unabashed Apple (AAPL +1.18%) cheerleader. It's a badge I wear proudly. But it's come at a cost. Given that shares are trading at roughly 40% below its 52-week high, I've paid dearly. Nobody's perfect. But somehow the market's expectations presumed this company could execute flawlessly forever. Investors are sad to discover that this company is not being led by magicians. Admittedly, I was shocked as well. But unlike most, I'm not scorned or bitter, nor do I feel the need for revenge. Let's have some perspective.
Has a good thing come to an end?
Lately, this has been the thought process. To that end, Apple's $137 billion cash hoard now offends a lot of people, one in particular being David Einhorn. There has been a deluge of articles demanding that Apple buys back stock, increase the dividend, or perform a combination thereof, with Einhorn's so-called "iPref" proposal leading the charge. It's a tug-of-war between Apple's ideals and how best to serve the interest of investors. Einhorn's proposal and his claims are not flawless, but that's not to say they lack merit.
Just ahead of Apple's annual shareholders meeting on Wednesday, a federal court sided with Einhorn's attempt to stop the company from putting a preferred stock proposal up for vote. But publicly undermining the company doesn't help matters. While Einhorn's proposal talks about ways to artificially create value for shareholders, it doesn't change sentiment. Nor does it address what is really at the center of this debate: Has a good thing come to an end? I don't think it has. With or without iPrefs (which are said to potentially unlock $150 per share), there's still considerable "organic" value in Apple, which is still the cheapest stock on the market.
Is the worst over or are there still execution risks?
I'm still bullish. But knowing now that Apple's leaders are actually human, there's also a degree of skepticism. For example, ahead of Apple's first-quarter report, news surfaced from The Wall Street Journal that Apple had made 50% cuts to iPhone 5 orders while citing "weaker-than-expected demand." This report coincided with concerns that the company had lost its knack for innovation, was losing its cachet to Google, and was also bleeding market share to Samsung. The list was long.
Others refuted the report, calling it "old news." But the stock still took a hit. And whether or not the news was relevant, it also brings up other potential scenarios, none of which were positive. Has Apple finally saturated the market? After all, it's been six years since the iPhone's debut. Management deserves credit for cutting orders (if that's truly what it was), since there's no point in carrying unnecessary inventory. But I do wonder why this supply/demand blockage was not anticipated sooner, especially on the heels of other gaffes related to the maps software.
These execution missteps are expected from BlackBerry and Hewlett-Packard, not at Apple. As an investor, I need to know if the worst is over and if this company is truly back on track to achieving its long term potential. If not, then I have to fully support Einhorn. But I'm not there yet. And what the company reveals on Wednesday should help me decide.
Where's the next leg of growth coming from?
What's next is certain to be a hot topic at the meeting. These days it's rumored to be the iWatch and the iTV, with the latter being the most anticipated. But can it disrupt the market? Apple would need to hit a home run on its first plate appearance. Given current conditions, it can't miss and expect to recover. Apple needs to buy Netflix (NFLX +0.43%). Given Netflix's $10 billion market cap, it would only cost $12.5 billion, or 9% of its cash to close the deal. In return, given Netflix's 27 million domestic subscribers, Apple could potentially generate $30 billion in smart TV unit revenue.
As great as Netflix is, content costs are still an issue. That House of Cards cost $100 million was a perfect example. It's a good show. But the math doesn't add up. Besides, Netflix is already at a competitive disadvantage to Apple and Google in digital ecosystems and price/margin. Carl Icahn and others would take Apple's offer and run. For Apple, an iTV would essentially be a 60-inch iPad. But adding Netflix and making it exclusive to Apple-only devices would immediately render all rivals irrelevant, including Google and Samsung -- pretty shrewd. Apple has always had a good-guy image. But the next leg of growth is going to require a killer instinct. Its future depends on it. Investors demand it. And I think Einhorn would be pleased.
