AAPL is worth about $800 billion right now. We’ve all seen the news about peak iPhone, China worries, ect. All those are true. For me the bull case for AAPL comes down to one thing: BUYBACK.
With the new tax rules, Apple’s cash is no longer stuck overseas. They have full access to the $250 billion in the bank without paying additional taxes. The Apple CFO already said they were committed to going cash neutral. In other words have enough cash to cover long term debt. As of last quarter Apple had about $125 billion in net cash.
Last year AAPL generated $77 billion in cash flow from operations. They paid $14 billion in dividends. Bottom line is Apple is generating mountain loads of cash and they will continue to generate $60-$75 billion in free cash flow from operations for many years.
Think Long Term.
Lets say worse case the share price stays flat or even drops another 10-20% the next year. Could easily happen. But that actually helps not hurts the bull case of buybacks. It means Apple has buyback more shares at cheaper prices.
If Apple stays at about $800 billion market cap Apple should be able to buy a huge chunk of shares the next 10 years.
Apple has $150 billion in cash to buy shares right now.
Apple generated $77 billion in free cash flows from operations last year. Even if profits/sales stay flat or even drop 5%-10%, they would still be generating over $70 billion in cash a year. Lets be conservative and say Apple uses $30 billion on dividends and investments a year. That leaves over $40 billion a year for buyback.
10 years x $40 billion = $400 billion + $125 billion in current cash.
Apple could buy 66% of the outstanding shares if the stock price remained flat. And over 70% if the stock dropped. Apple could even get more aggressive and spend an additional $50 billion and just hold a larger debt/asset ratio. They could buy 75% of outstanding shares. And what if Apple actually grows revenue/profit?
If Apple buys 75% of its shares and the company’s market cap is flat at $800 billion, the price of the shares will go up 400%.
Not constant price. Constant market cap. Using accumulated retained earnings to buy back shares reduce market cap but should not if buy back money is from cash generated from current operations.
New market cap = $800B + cash generated from current operation
Author is saying use all the cash generated to fund dividend payout and buyback share.
So market cap should remain constant.
Price is not constant. That’s exactly my point. The author’s math is deeply flawed.
If you assume constant market cap at 800B, and there’re only 10 shares left, each share will cost you 80B.
The author knew this, as he concludes share price will go up 400%. But yet he assumes the cost to Apple’s buyback program is a constant 2018 share price.
Elementary error like this tells me I don’t even need to bother with the rest of his arguments.
I agree as this is only approximation, not 100% right, but the idea is practically working out. Apple has become cash flow machine generating 50B - 70B cash producing.
manch wants to show that he is financially savvy. Might as well challenge that since business is in decline, cashflow generated would be declining at a rate of 10% and market cap can’t be constant and in fact should be declining since biz is declining hence should be increasingly worth less.
Free cash flow growth of about 4% annually over the next 10 years
Free cash flow of about 3% annually in perpetuity beyond year 10
A discount rate of 10% used to calculate the present value of future cash flows
For this market leader, a 16% margin of safety is plenty.
If I guess right, when FED is not raising rates on Dec 18-19th, all stocks will go up there after. Until then, whatever stocks we grab, are the last chance to get a deal, esp low priced AAPL at $169 range.