Editorial Commentary
The Challenges of Success
How can Apple, or any successful company, keep succeeding indefinitely?
By Harvard Winters
December 27, 2014
When drug dealer George Jung, played by Johnny Depp in the 2001 movie Blow, expanded the U.S. market for cocaine in the late 1970s, he and his partner were successful beyond their wildest dreams. They were so successful that they faced a problem: a house filled with overflowing boxes of money.
Apple´s CEO Tim Cook now faces the same problem: What do we do with all of the cash? Apple sells several products that seem only slightly less addictive than Jung’s. And lots more cash is on the way.
Apple’s products are immensely popular. Apple has sold more than 591 million iPhones and over 237 million iPads. The fruits of that remarkable success are unmistakable. Apple is now sitting on more than $155 billion in cash and marketable securities, even as it plows billions a year back into its businesses, pays dividends, and repurchases shares. If it’s hard to imagine how much money that is, imagine that Apple hired 100,000 additional engineers at $155,000 per year each. The $155 billion would pay their salaries for 10 years.
Most people who start their own businesses begin with a small pile of money that they hope to transform into a large one. If they beat the odds and succeed, they face a different kind of challenge. Do they plow everything they’ve earned back into their business, strike out in a different direction, or take some chips off the table?
Picking the right next step is even more challenging for the CEO of a large, highly successful public company. Success and wealth breed confidence but sometimes also hubris, and accolades from your customers and a fawning business press don’t help. Armchair CEOs, most with little or no skin in the game, frequently goad the real CEOs to double down. It must be hard to resist.
Apple is now by far the most valuable publicly traded company in the world, with a $656 billion market cap. Apple’s current valuation, at 14.4 times expected 2015 earnings, hardly looks rich when you consider its growth prospects and how little it earns on its cash. Apple could get a lot bigger.
Some Apple investors are eager to see how high the valuation can go, and how fast. But $656 billion is an immense base from which to grow. Apple’s market cap was only $6.6 billion when it launched the iPod in November 2001. It grew to $106 billion by the June 2007 launch of the iPhone, but its capital expenditures in that fiscal year were only $1 billion. So it’s natural for some to fear that, with all of that cash sitting around, Apple eventually will mistake temptation for opportunity and take a giant, risky gamble.
With another $47 billion or so of earnings expected in the 2015 fiscal year, it’s logical for Apple to expand dividends and share buybacks. Apple began paying a meaningful dividend in 2012, and the stock now sports a 1.7% yield. Apple has spent nearly $22 billion on dividends in the past two fiscal years and $68 billion on buybacks.
Apple could invest the excess cash in the business, but it would need to increase its capital expenditures by a factor of 12 to spend the cash over the next year. Could anyone—Tim Cook or even a resurrected Steve Jobs—make such huge investments without wasting most of it?
Apple also could invest in the business by pursuing a giant acquisition. Few deals, within the tech sector or otherwise, provide meaningful benefits to the acquirer. Most are losers. Even a brilliantly conceived deal does the buyer little good if it’s badly priced or executed. Attempts at major shifts in strategic direction are often costly failures. These facts are hiding in plain sight; companies reject them at their shareholders’ peril.
How Wrong Can Icahn Be?
Carl Icahn says he thinks fair value for Apple stock is over $200 per share, nearly double the current price. If he’s right, buybacks at Apple’s current price make a lot of sense. He has to be very wrong for them to be a bad idea.
A year ago, Icahn lobbied Apple for a $150 billion buyback. It’s probably no coincidence that such a plan would have used up all of the excess cash.
With iPhone 6s and other devices flying out of stores as fast as they come in, Apple’s cash balance will keep growing. That’s not a problem; it’s the ultimate measure of success.
Some suggestions from the business press on how to fix the so-called problem are astonishing. Several financial journalists have advised the company to avoid giving the money back to billionaires like Icahn, as if he were the only Apple shareholder and spiting him were a laudable goal. Their idea is that Apple should cut its prices on the iPhone and increase market share.
Doing this would almost certainly reduce Apple’s earnings and lower its stock price, penalizing all shareholders. It would turn Apple’s cellphone business into Samsung’s, which would love to have the brand loyalty and pricing power that Apple enjoys.
Other critics condemn Apple for not creating a revolutionary product every year. Why can’t they completely reinvent the iPhone, or get into the car business?
Business has become a spectator sport in which no idea is too bold, at least for some of the militant fans. But sometimes the long bomb explodes. More often the winning play is the boring one.
Profits and cash flow are a sign of success, not failure. The companies without them should be re-evaluating their strategies, not the companies with them.
Jung ultimately made a big mistake with his cash. Rather than paying a steep fee to launder it, he deposited it in a Panamanian bank. But the bank eventually was nationalized, and Jung lost everything. At that point, he probably thought longingly about his money-cluttered house.
Apple’s money-clutter will only continue to grow, unless the company returns a lot more money to shareholders or makes bad business decisions. Let’s hope that Cook makes the right choices. Apple shareholders don’t want to end up feeling like Jung.
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