Apple: Great Business, but Poor Investment?
I have been following this board for the last 12 months and own a small portion of AAPL since about 18 months. Reading the discussions here and watching the stock's moves, one main theme keeps coming back to my mind:
It seems that almost everyone agrees that AAPL is a great business. But at the same time, it may not be so clear whether it also is a great stock to own, and I also have become unsure about that. Let me explain.
There is hardly a way to deny that Apple's management has performed extremely well during the past ten years. Revenue and EBIT haven't stopped climbing recently and they probably won't for the time being. However, this does not NECESSARILY mean that an investor will profit from this in future. Indicators such as EPS are highly variable, and while AAPL's seem pretty low as of today, there is no reason why this indicator could not drop further down. The key question is, from my perspective, how an investor will profit from raising earnings and revenues at Apple!
Firstly, a company that's really doing well could pay dividends to its shareholders, which Apple doesn't seem to be planning to do anytime soon (despite tons of cash at the bank). This way, therefore, will probably not be the one to attract investors.
Secondly, a company that's really doing well could be taken over by a larger player in the market. Usually, this scenario represents an attractive margin at least for longer time investors. Again, won't happen with Apple since they are much too big.
Thirdly, a company that's really doing well could start buying back shares so it cannot be taken over so easily. This usually proves to generate a margin for an investor, but Apple doesn't seem to be willing to do so (and there is certainly no need at this point, either).
Please don't get me wrong - these three factors don't have to happen to generate a return for an investor, but I believe the potential for them to happen has to be there. If none of these three things can potentially happen, what way to make money with a stock stays? (This is probably also the reason why really large companies tend to pay dividends!)
There may be one or two more ways for a company to generate fundamental value for an investor but they provide that the company is interested in keeping the stock price up. But (and this is the "key but") Apple does not need to care about the stock price. They have so much cash on the bank, and earnings keep rising, that they probably won't need to raise additional money at the stock market any time soon (meaning e.g. the next 20 years). And there is no other reason for a company to care about the stock price, is there?
Just imagine a scenario in which Apple keeps up it's phenomenal successes for, say, another twenty years. They will continue to build really great products, invest some money here and there, and save lots of it on the bank. The stock may rise a little here and there, but mostly move sidways over the two decades.
Yes, EPS would then go down to as little as, maybe, 4 or 5. But who cares? If the market mechanisms described above are sort of out of order, the basic reason for investors to maintain an industry average EPS of say 15 to 20 is simply not in place!
Concluding, I wonder whether there are any real-life examples in the history of the stock market where a company maintained an industry average EPS while growing earnings significantly, while not paying dividends to it's shareholders and while having a market cap as large or larger as Apple's one.
What does it all mean for me? Well, I am going to stay invested in AAPL for the time being (since Apple might change it's course and start to pay out money) but I won't let it exceed a ca. 5 percent portion of my portfolio...
Hope this contribution didn't repeat too much of what has been discussed here before!
Best regards from Germany