Aswath Damodaran, NYU’s legendary valuation expert, recently argued that there was a 90 per cent chance that Apple was undervalued. This comes in the wake of Apple shares’ breathtaking plunge from recent highs.
In a new blog post, Damodaran thinks that management can learn a few things from the recent market volatility, and he offers some advice.
“I know… I know… All of this will make Apple a more boring company,” he writes.
But if Apple can incorporate these tips, the stock may regain respect in the markets.
Here are his four tips verbatim. Emphasis ours:
- Build up credibility with investors: The company has to regain credibility with investors. Apple has acquired a reputation for lowballing its expected results, prior to earnings reports. Instead of making it easier for the company to beat expectations, it has led instead to markets paying little heed to the guidance. In fact, it looks like Apple is taking the first step towards doing this by adopting the Amazon strategy of giving wide bands of forecasts for expected earnings. There will be traders/analysts/investors who will be upset, and may abandon the stock. Good!!!
- Be transparent: Become more open about long-term strategy and products. I think that Apple’s secrecy about new products and strategies may be a great marketing strategy but it creates an information vacuum, which is filled with rumours and fantasy. I know that Apple also worries about giving away information to its competitors, but when you are a company the size of Apple, the news will get out to your competitors any way. So, stop acting like you are protecting national security and start acting like a business!!
- Take a stand: The company has to stop trying to be all things to all investors and make its stand on whether it sees itself more as a growth company or a more mature company. Picking one does not mean that the company is giving up on the other, since a mature company can still pursues growth prospects, but it does lay down markers that will determine your investor base.
- Behave consistently with your choice: Once Apple makes its stand as a growth or mature company, it has to behave consistently. Thus, if it decides that it is a mature company, it should return more cash to its stockholders, though I think stock buybacks make more sense to its stockholder base now than dividends do. At the moment, with its huge cash balance, it clearly does not make any sense for Apple to borrow money, but somewhere down the road, it has to consider the debt option, since not using it is depriving itself of the tax benefits embedded in the tax code for using debt instead of equity.
Despite offering recommendations that would make the company “boring,” Damodaran thinks Apple could become exciting again by going for “creative destruction in new markets.”
“I am sure that my airline experience would be better on Apple Air, my hotel stay more comfortable at Apple Hotels and my tax money better spent with Apple Government,” he half-jokes.
Read more at MusingsOnMarkets.