Investors have 2 more questions for Apple

The tech giant's market cap jumped $37 billion after record fourth-quarter results, and the board has a mountain of cash to put to work.

By The Fiscal Times Jan 25, 2012 1:04PM
Apple EconomyBy Suzanne McGee, The Fiscal Times

After the death of Steve Jobs Apple (AAPL) investors wondered if the company would continue to thrive.

That question was answered resoundingly late Tuesday when Apple reported a blockbuster fourth quarter -- the best on record for both sales and revenues. Total revenue soared 73% from year-earlier levels, meaning that the company booked more in sales in that fourth quarter than it had in the other nine months of 2011.

It's all about smartphones -- and despite competition from rival manufacturers, Apple's iPhone continues to dominate the market. So great is demand that consumers are having to wait, the company's chief financial officer told analysts on a conference call late yesterday afternoon.

The news almost instantly added $37.2 billion in value to Apple's market capitalization, as the company's stock price soared about $40 a share in aftermarket trading, reversing a day in which it had significantly lagged broad market indicators. (Shares opened Wednesday morning at $454, which must have made recent buyers of out-of-the-money call options very happy indeed.)

After a string of underwhelming earnings from bellwether companies, some traders had begun bracing for a shock from Apple as well. After all, the company, which tends to be extremely conservative when it comes to providing guidance to analysts, had long had a history of trouncing forecasts when it reported actual earnings -- right up until last fall's disappointment. Some uneasy traders had begun wondering whether such disappointments might be a hallmark of the new post-Jobs Apple, although those jitters weren't reflected among analysts, all but a handful of whom have remained bullish and kept "buy" ratings on the stock over the last three months.

Apple's success selling iPhones and the fevered demand for smartphones in general poses some interesting questions about the outlook for telecommunications service providers like AT&T, however. For every smartphone an eager Apple consumer buys, AT&T and other providers have to deliver service -- and it's a costly struggle to provide enough spectrum to serve those customers. That's something to ponder, both for investors looking for an additional way to "play" the smartphone trend and for smartphone owners themselves.

For now, however, the only people likely to be somewhat unhappy with Apple's astonishing quarter are the folks over at Amazon (sales of Apple’s relatively costly iPad device were robust, proving that Amazon's (AMZN) Kindle Fire isn't going to eradicate demand for the premium-priced product) and perhaps the analysts themselves. After all, it isn't often that pundits get it so terribly wrong, and underestimate the amount of bullish news. But then who would have predicted that with all the costly television ads touting other smartphones over the holiday season, sales of iPhones would hit 37 million during the quarter? This pushed Apple's smartphone market share to 25% from 18% in mid-2011.

Now there are only two questions on investors' minds: When will Apple stock finally blow through the $500 level (the median forecast is $515 a share) and what on earth is Apple going to do with its even-larger cash mountain, now at $97.6 billion?

As Howard Silverblatt, senior index analyst at Standard & Poor's, noted after the earnings announcement, the jump in market capitalization makes Apple the largest company in the world, bypassing Exxon Mobil (XOM). But Exxon pays a dividend, so investors get to collect a yield of 2.16%, and own shares that trade at a relatively modest 10.36 times earnings. Apple, on the other hand, has yet to pay investors a dividend at all, despite sitting on cash that exceeds the gross national products of a number of countries in the world -- and it trades about 15 times trailing earnings.

That's an issue Apple's board is going to have to confront. After all, the company has proved its ability to stay ahead of the game in research and development and still accumulate a massive amount of cash. After a certain point, keeping so many billions in cash is about as sensible as storing wads of dollar bills in your mattress. Peter Oppenheimer, the company's chief financial officer, may try to assure investors that the company and board are actively discussing what to do about this "problem," but shareholders will be increasingly anxious for them to finally make a decision.

Indeed, speculation that Apple will finally join the ranks of dividend-paying stocks in light of this upbeat earnings report is likely to keep the stock buoyant in coming weeks, putting a floor under the share price once the market has finished digesting the news. Don't bet on being able to buy the stock back where it was before the earnings announcement for some weeks to come.

Related stories:
The Apple Economy
Steve Jobs: 10 Revealing Quotes from His Biography
The iPhone Economy: A Pocket Full of Miracles
Kindle Fire Takes a Bite Out of Apple

1Comment
Jan 25, 2012 2:22PM
avatar

i dont think Apple can do more for their employees, customer base, investors and America by constructing a state of the art fully blown manufacturing facility to produce 'Made in America' iphones, ipads, ipods n select Macintosh computers with their cash hoard.

 

They would still continue manufacturing overseas. This American facility would supplement their overseas factories and hedge production problems we've seen of late. This would be a no nonesense no less than 25 manufacturing plant conglomerate throughout the 50 US states over the next 20 years.

 

I would be honored to be involved with initial ground feasible planning and purpose.

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