BLODGET: I Am Also An Apple Shareholder And I Have Also Written A Letter To Tim Cook

An Apple shareholder named Carl Icahn has written a letter to Apple CEO Tim Cook.

Mr. Icahn, who just bought Apple stock, wants Apple to immediately buy back $US150 billion of its stock. To fund this purchase, Mr. Icahn wants Apple to borrow $US150 billion, or use some of its cash and borrow the rest.

Mr. Icahn believes that this buyback would immediately increase Apple’s share price by 33%, sending the stock price soaring back to its high of $US700 a share.

Icahn also believes that, if Apple continues to grow at a compelling rate over the next several years, this buyback will cause the stock to soon blast through $US1,000 a share.

Well, I am an Apple shareholder, too.

And I disagree with Carl Icahn.

I don’t want Apple to do a massive immediate share buyback. And I especially don’t want Apple to borrow more money to do it.

I believe that borrowing $US150 billion to fund a one-time stock buyback would be the height of short-term financial thinking. This short-term financial thinking is exactly the opposite of what Apple is (and should be) all about.

Regardless of what this buyback did to the share price over the near term, it would saddle Apple with a massive debt load. This debt load would reduce the company’s flexibility during a critical period, and it would increase the risk that, if Apple stumbles, its stock price will get clobbered or wiped out. A debt-funded buyback would not help Apple build better products, improve its competitive position, help its customers, or increase the value of its long-term business. It would be nothing more than short-term financial engineering to appease short-term shareholders whose only interest in Apple is a quick score. To its great credit, Apple has never been about quick scores.

I do agree with Carl Icahn that Apple has more cash and cash flow than it needs, and, therefore, I would like to see Apple increase its dividend and stock buybacks. But not in a big one-time gift. And not by borrowing $US150 billion.

So on behalf of all Apple shareholders who care about Apple, Apple products, and the long-term value of the Apple franchise, I am writing my own letter to Tim Cook.

Dear Tim:

I have not yet had the pleasure of meeting you, but I hope to at some point. I have been a happy Apple customer for 6 years, and a happy Apple shareholder for 6 months. I have also observed Apple from afar for the last three decades, as a consumer, a Wall Street stock analyst, and a journalist.

I want to start by saying that the grace, poise, and confidence with which you have led Apple in the two years since Steve Jobs died has been an inspiration to everyone. You had an unfathomably tough act to follow, and you have risen to the challenge. You have already shown the world that Apple will carry on without Steve, an accomplishment that no one would have been happier and more proud of than him. Under your leadership, Apple has continued to launch amazing new products and remain one of the greatest and most inspiring companies in history.

As you are obviously aware, Apple’s share price has been volatile for the past year. In the summer and fall of 2012, it soared to $US700. Then it dropped by almost half to the high $US300s. Now it has climbed back above $US500.

Don’t worry about this volatility.

You didn’t cause it. And you can’t control it. And your long-term shareholders — the only ones you should care about — are doing just fine.

In fact, your long-term shareholders are doing better than fine. 15 years ago, when Apple almost went bankrupt, its stock traded as low as $US3. As recently as six years ago, Apple’s stock was trading below $US100. A 5X return over six years is a better return than any shareholder could ever ask for.

Also, you didn’t cause Apple’s stock price to soar up to $US700 last fall. You didn’t promise anything you didn’t deliver, or make exaggerated claims about an impossibly rosy future.

What caused your stock to soar to $US700 was a mistake made by some of the same people who are now demanding that you make short-term financial engineering decisions to boost their short-term returns: Wall Street traders.

Short-term volatility in the stock market is nothing new, and it is not worth worrying about. Great CEOs and value-creators like Amazon CEO Jeff Bezos and Google CEO Larry Page don’t worry about short-term volatility. And neither should you. Over the past 15 years, by producing great products, Apple has delivered extraordinary returns to shareholders. If Apple continues to produce great products over the next 15 years, Apple will continue to deliver extraordinary returns.

If Apple continues to focus on products and customers, in other words, Apple’s stock price will take care of itself.

But I know that is not what you are hearing these days from another Apple shareholder, Carl Icahn.

Mr. Icahn, who just bought your stock last month — and owns only a fraction of one per cent of the company — is demanding that you immediately engage in a massive financial engineering scheme to boost your stock price and give him and other short-term traders a quick payoff.

Specifically, Mr. Icahn is demanding that you buy back $US150 billion of your own stock, taking on $US150 billion of debt to do it.

Mr. Icahn says this buyback will instantly increase your stock price by 33%. And then, Mr. Icahn continues, if you continue to grow Apple’s cash flow, this added “leverage” will soon cause Apple’s stock price to blast through $US1,000.

To be clear: It is possible that Mr. Icahn is right.

It is possible that, if you borrow $US150 billion and use it to buy back your stock, that your stock price will pop back to $US700. And it is possible that, with a smaller equity share base, if you continue to grow your cash flow over the next couple of years, Apple shares will rise to $US1,000.

It is possible.

But it is far from guaranteed.

Meanwhile, if you borrow $US150 billion — or even if you only borrow, say, $US100 billion, and fund the rest of the purchase with cash on your balance sheet — you will have saddled Apple with a massive debt load.

This massive debt load will reduce Apple’s flexibility during a critical time for the company and industry.

The premium smartphone market, which has driven Apple’s extraordinary profit growth over the past 5 years, is maturing rapidly. The future growth in smartphones will mostly come in emerging markets, where Apple’s smartphone business is not strong. Meanwhile, other smartphone and tablet makers have begun to produce excellent products that significantly undercut Apple on price.

Apple has responded intelligently to this threat — offering modestly lower-priced smartphones and tablets — but Apple is also still trying to hang on to its amazingly high profit margin. This is an understandable but risky strategy, especially in a “platform” market in which market share matters.

It is possible that your current strategy of maintaining high prices and super-high profit margins is the best one. But I like the fact that you have the financial power and flexibility to reconsider that strategy if seems wise to. I like it in part because I do not yet know what products you have in development that might drive major revenue growth for Apple going forward.

I also really like the fact that you haven’t saddled yourself with a humongous mountain of debt while navigating this product and market transition.

After all, tech markets change fast, as the experience of companies like BlackBerry, HP, Microsoft, Palm, Dell, and Apple in the 1990s make clear. If you are wrong, and smartphone and tablet prices continue to decline rapidly, and Android continues to take over the world, your profits and profit margins are going to decline regardless. And better that they decline with your still having $US150 billion of cash and little debt than after tying what amounts to a dead elephant on your back.

Importantly, I do agree with Carl Icahn on one point.

I agree that you have more cash than you need and that you should use more of this cash to increase your dividend and buy back stock.

I think you should do this over time, though, rather than in a big one-time gift.

If you do it over time, in the form of increased quarterly dividends and buy-back programs, you can change this use of cash if the circumstances merit. And you will be rewarding the shareholders who, like you, are around for the long haul.

If you do it all in one shot, however, the cash will be gone.

And I don’t need to tell you that, if you do it in one shot, investors like Carl Icahn will also soon be gone.

In short, as an Apple shareholder, I would much rather have you keep your $US150 billion of cash, skip the financial engineering, resist the relentless short-term greed of Wall Street, and focus on what you do best: Building great products.

If you do that, over the long haul, your stock price will take care of itself.


Henry Blodget

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