Aaron Task and I discussed Apple on Daily Ticker this morning. Please see the video below….
Apple reported solid quarterly results yesterday.
The results weren’t fantastic. They didn’t blow anyone’s mind.
But they were solid. And this performance, plus Apple’s (AAPL) commentary on its earnings call, helped answer some questions that Apple investors and fans have been asking over the course of this year.
First, Apple announced — in its own Apple way — that it will be launching at least one new product category next year:
“In terms of new product categories,” Apple CEO Tim Cook said, referring to products the company might roll out in 2014, “…I think no one has a set of skills like us and we obviously believe that we can use our skills in building other great products that are in categories that represent areas where we do not participate today.”
That’s as close as Apple is likely every going to get to saying that it will be launching at least one new product category next year. The betting is that this new category will either be an Apple television set (“iTV”?) or Apple smartwatch (or, in a dream world for Apple fans, both). When, exactly, this product category will launch and whether it will be hot enough to contribute materially to Apple’s growth are still topics of fierce debate.
Second, Apple demonstrated that its iPhone business is still quite healthy, especially in the United States. iPhone sales exceeded expectations, with nearly 34 million sold versus the 31 million consensus estimate. The iPhone is by far Apple’s most important and profitable product, and this performance eased fears that Apple has lost its edge in smartphones and that it will be forced to slash prices to stay competitive. (Apple is indeed cutting prices — the average selling price of iPhones dropped sharply in the quarter, but this is the result of Apple offering cheaper models of phones, not slashing prices on its flagship.)
Third, Apple explicitly addressed the “cash question” — the demand by one very vocal new investor, Carl Icahn, that Apple borrow $150 billion and use it to buy back $150 billion-worth of stock, thus “returning cash to shareholders.”
Icahn’s argument is that this one-time bonanza will unlock the value trapped in Apple’s massive $147 billion cash balance and result in an immediate boost in Apple’s share price. Other Apple investors, however, myself included, think that borrowing $150 billion would be a terrible idea, regardless of its impact on Apple’s share price. We would rather see Apple increase its buyback and/or dividends over time, rather than loading itself up with debt and buying back stock in one huge lump sum.
(Apple’s cash balance is stored overseas, so Apple can’t use the cash to buy back the $150 billion of stock without paying huge taxes on the “repatriation.” Thus Icahn’s suggestion that the company borrow it.)
Apple did not say exactly what it planned to do on the buyback question. But it did say that, if it chooses to do something different with its cash, it will make this decision early next year. Apple also noted that it is currently returning all of the cash it generates in the United States to shareholders. The entire $147 billion on its balance sheet, meanwhile, is overseas.)
So Icahn has prompted Apple to publicly respond to his demands. And Apple, meanwhile, has politely put the famous activist investor off, at least for several more months.
Bottom line, Apple answered a lot of important questions on yesterday’s call. We still don’t know the answer to the most critical questions — when, exactly, the new product categories will launch and how attractive they will be — but we’ll probably get those answers within the next year.