[11/29: Update added at the bottom of this post. Also, the author was long YHOO and BABA at the time of writing]
I am a big fan of both Apple and Tim Cook. I have been for a while. I said Cook would do a great job as CEO 6 months before Steve Jobs died and defended his record 2 years ago when people were saying he wasn’t “innovative” enough.
However, I do have a big problem with one choice Cook has made over his tenure as CEO of Apple. It’s not the lack of a bigger screen iPhone sooner or his original choice of head of Apple Retail before Angela Ahrendts. It’s his decision to spend $100 billion and counting of Apple cash on a capital return program.
The program was announced in April 2012. It was the first time since 1995 (before Jobs returned to the company) that Apple had paid a dividend. To date, it’s been estimated that Apple has used more than $100 billion of its cash on dividends and stock buybacks. To me, that’s madness.
Prior to Cook’s decision to start spending cash on dividends and buybacks, Apple was content to let it accumulate on its balance sheet. The company had gone through a near death experience in 1997 and obviously wanted to ensure it had a sufficient cash cushion to continue to fund its operations in case the markets ever turned against it.
By 2012, lots of Wall Street analysts had begun complaining that Apple simply had too much cash sitting idle on its balance sheet and it should either invest it through R&D or M&A or return it to shareholders.
There are generally 3 points of view regarding Cook’s decision to start this capital return program:
(1) Carl Icahn and most other observers affiliated with Wall Street think it was smart and, if anything, hasn’t gone far enough.
(2) Chamath Palihapitiya – a former Facebook (FB) exec who is now a venture investor and a part-owner of the Golden State Warriors basketball team – and most tech people affiliated with Silicon Valley think it was dumb and signals that the company believes it has run out of areas to innovate in.
(3) Apple blogger John Gruber thinks there’s no harm no foul in spending money on the dividends and buybacks and supports not spending money excessively on M&A because part of Apple’s success has been staying focused – “a thousand no’s for every yes.”
I believe the capital return program has been a total waste of Apple’s hard-earned $100 billion. I believe – although this is impossible to prove – that Apple’s stock price would be just as high as it is today (or more likely higher) had they spent that $100 billion on a combination of smart M&A and smart R&D that would have continued to extend Apple’s lead over other Android phone makers.
Had Apple not spent any money on a capital return plan, it would now have over $255 billion in cash on its balance sheet – a quarter of a trillion dollars.
If I had a chance to have a coffee today with Tim Cook and he still had $250 billion (with access to much more zero interest cash through debt which he’s only used to date for funding the capital return plan), I would suggest he do five things before Monday morning:
Buy Tesla (TSLA) for $45 billion (representing a 50% premium over yesterday’s closing price) – and before he complained that that’s too much money, I’d point out that if he’d listened to me on February 20th and bought Tesla, it would have been 16% less that what he has to pay now.
Buy Twitter (TWTR) for $39 billion (representing a 50% premium over yesterday’s closing price) – unfortunately that’s 4x what it would have cost Apple to buy Twitter back in April 2012 when I suggested to just after Facebook (FB) had bought Instagram for $1 billion.
Buy Pinterest for $15 billion (a 50% premium over what the private company is rumored to now be worth, although it might be more now).
Spend $10 billion on better batteries through R&D. To be fair, you’d get some of this already through the Tesla acquisition. But is there anything more frustrating to current iPhone users than poor battery life?
Spend another $10 billion on other materials or features which are going to corner the market on some features that consumers will love yet will be difficult for Android makers to copy. How about $10 billion just to make iCloud work properly?
Altogether, this M&A and R&D spree would cost Apple $119 billion. Their cash levels would be $136 billion today instead of $155 billion. They wouldn’t have much revenue to show for that $119 billion but how much higher would Apple’s market cap be than the $700 billion it is today? If Apple owned Tesla, Twitter and Pinterest? That would be worth at least another $50 – 100 billion in stock value.
It seems like many on Wall Street believe the capital return program is the reason for the renewed vigor in Apple’s stock price which is up 48% this year alone. They say that new kinds of institutional investors plus widow and orphan type retail investors have been attracted to now own Apple stock because of the dividend yield they receive.
However, recall that the capital return program was announced in the Spring of 2012. Apple’s stock price initially dropped in the first few weeks afterwards. It then rushed up through September 2012 to all-time highs before losing half its value. The stock price bottomed out in mid-2013 and only really started taking off this year after a very bullish April earnings report.
Correlation is not causation. It’s not the Apple capital return program that made people want to buy (or sell) the stock. Rather, it’s Apple’s product cycle, margins, and top-line revenue growth.
Two years ago, people worried that Apple was a “hits-based” business relying on new phones each year. It seemed like margins had peaked and Cassandras were shouting that no consumer electronics company – certainly not one without Steve Jobs any more – could keep competitors from eating away at that margin. Samsung seemed ready to ascend to Apple’s throne. Tim Cook seemed to be a care-taker.
Sentiment about Apple the stock didn’t change because they started paying a dividend in my view. Sentiment turned around when Apple kept crushing earnings, people realized that the Apple ecosystem was a lot stickier than first thought, and Eddy Cue said in May that Apple had a product roadmap which was the best he’d seen in the last 25 years.
It’s always been the product which has driven Apple’s stock and always will be.
The day Apple decided to get on the treadmill of paying out money to investors forever through dividends and buybacks is that day they admitted to the world that they can’t walk and chew gum at the same time. A lot of potential innovation inside Apple died that day.
John Gruber – whom I respect immensely, and who humorously referred to me as “Action Jackson” for imploring Apple to “do something” with their cash – defended Cook’s decision to do the capital allocation because (A) he thought it was smart for Apple to adhere to a policy of focus over willy-nilly acquisitions and (B) he believed it would be marginally positive for the stock which helps with employee retention. (I’m going by memory from a Twitter exchange I had with Gruber 9 months ago, but I’m pretty sure that was his reasoning.)
Here’s why I think John Gruber is wrong on this issue. Anti-M&A Apple enthusiasts always say that, because Apple has never done big acquisitions, and Apple has been successful, Apple therefore shouldn’t do acquisitions. This is mixing correlation with causation again though in my view.
There’s nothing inherently wrong with acquisitions. They have to be value-enhancing and help extend the business in a direction it wants to go. If done right, they can be very value-enhancing. Don’t forget: Apple itself wouldn’t exist in its present form had it not been for an acquisition – the 1996 acquisition of NeXT Software for $400 million, returning Steve Jobs to Apple. I’d say that was a good use of $400 million versus if they’d simply paid it out in a dividend.
Even Apple seems to acknowledge this logic of the benefit of big acquisitions with its recent $3 billion buy of Beats to supplement its iTunes business.
In terms of the focus argument, Apple has about 45,000 non-retail employees today which is about the same number as Google (GOOG). If Apple bought Tesla, Twitter, and Pinterest, they’d gain 9,000 additional employees (although surely there’d be some redundancies here – 5800 for Tesla, 3000 for Twitter, 200 for Pinterest). That’s about a 20% increase in headcount. I think a company like Apple can surely handle that and keep its focus. I just don’t think things are so sacrosanct at Apple that they can’t manage these additional people.
Oh and I’m not alone in pushing for Apple to buy Tesla (which would represent 5,800 of the new 6,100 employees Apple would gain through the 3 acquisitions I’m advocating). Chamath is – I think — the guy who originally argued for this deal. John Gruber agreed with my idea of buying Tesla. Jay Yarow of Business Insider also recently extended my original argument. So, we’re all in agreement that this would be a brilliant – and frankly breath-taking – acquisition Cook should make. In some ways, it would very much resemble the NeXT deal and how important Musk could be inside Apple the way Jobs was.
Now, I’ve argued that Apple should make other acquisitions in the past. Some will say here goes “Action Jackson” again. But let’s review what I said.
I argued in the past that Apple should buy Yahoo (YHOO) for $23 billion back when Yahoo’s market cap was $18 billion. Now Yahoo’s market cap is $50 billion. I believed that deal would have helped given Apple some real web services which it still is lacking, plus a great partner in China through owning (what at that time would have been) 40% of Alibaba (BABA).
I also argued that Apple should have bought Facebook for $100 billion back in 2011 when it was being privately valued at $50 billion and critics were screaming that was way too expensive.
Would all of these deals shown a lack of focus?
Apple’s still doing something – who knows what? – with iAd. They’re putting some focus there. If you’re going to do that, why not have just bought Facebook for $100 billion and let Mark Zuckerberg continue to run it (if he would have accepted Cook’s offer). You don’t have to worrying about losing your focus. You’re paying Zuck $100 billion to have focus for you over that asset. (And wouldn’t Google have just hated Apple had they had the moxie to do this?)
Apple’s still focusing on web services and messing around with that area – not impressively. If they’re going to devote some focus there, why not just own Yahoo and have Marissa Mayer run that area for them? Oh and they would have acquired a 40% interest in Alibaba which is today worth $112 billion (pre-tax).
And, while it wasn’t something I argued for at the time, you can understand now what the value to Apple would have been if they’d bought Dropbox for “nine figures” (which is less than $1 billion for those math-challenged) back in 2009. Why did Steve Jobs stubbornly push back from the table and say Dropbox’s price was too high? Every time I interact with iCloud, I curse the day Jobs got cheap and thought Apple was better off staying focused and not buying Dropbox.
So, please don’t lecture me about focus when I criticize the folly of Apple for being too “stand pat.” Apple – and only Apple due to its size and cash balances at the time – could have spent $124 billion on Facebook, Dropbox and Yahoo and today control assets worth $338 billion (just for Facebook’s equity value, Dropbox’s estimated $10 billion in value, and the 40% stake in Alibaba). That means Apple would already be a trillion dollar company today easy.
Apple’s still focusing on iAd and web services today and they’ve still blown $100 billion on dividends and buybacks but they don’t have anything to show for it. Let’s not try and defend these lack of decisions as Tim Cook being focused or a thousand no’s for every yes.
Apple could have a quarter of a trillion dollars today in cash to put to work today. They could become the overnight leader in smart cars by buying Tesla. They could – more importantly – acquire our generation’s single greatest technological leader in Elon Musk and give him carte blanche to paint his canvas. (Somehow, I think Musk could find a better use of $100 billion than handing it over to shareholders.) They could acquire the single most unique and intriguing asset in the social networking world today in Twitter which, despite the recent management criticisms, is only going to be more important to our culture moving forward. They could acquire the single greatest threat to Google search in the last 15 years by buying Pinterest.
Tim Cook could make all this happen before we return to work from Thanksgiving next Monday. He could make Apple – a fundamentally great company – into a remarkably exciting company unlike any other in the world.
He should do this, but I doubt he will.
I doubt he will because he’s married a fickle lover in Wall Street. He’s paid Wall Street $100 billion to date and promised countless more billions in the future. This doesn’t make Apple a better company or promise a brighter future. And it doesn’t raise the stock any higher than it would rise anyway on the hopes of the latest round of new products.
There are times I agree companies should pay out cash to shareholders in dividends or buybacks instead of doing pointless M&A. I’d rather see Yahoo do that right now than spend billions more on another Tumblr and 3 dozen nameless acqui-hire companies.
But Apple can do much better for itself now with its billions rather than continue wasting them on nameless, faceless Wall Street mutual fund managers. No one else can put $100 billion to use on M&A and R&D other than Apple to transform itself for the better.
Only Apple can spend $100 billion wisely.
It’s time for Tim Cook to think different.
Update [11/29]: Comments and tweets are running about 99 to 1 anti-Eric’s argument above. I basically have Jay Yarow (partially) in my corner and some random guy on Twitter and that’s it.
However, I want to add to the argument above based on the reaction so far.
1. I would rather have seen Apple keep $100 billion over the last 2.5 years instead of paying it out to shareholders. Either you agree with me or you shrug your shoulders and say “what’s the big deal?” I think it is a big deal. It’s $100 billion! That’s nothing to shrug your shoulders at. It took Apple as a company a lifetime to be in the fortunate position to have generated that much capital and I think they should have kept it than paid it out. At the least, they should stop this capital return plan and keep everything from here.
I don’t think Apple’s stock price would be any different today with our without the capital payout program. I can’t prove that obviously but, guess what? Neither can those saying it is perfectly correlated to the recent rise in Apple’s stock price.
Apple’s stock initially dropped after they announced their plan in 2012. Wall Street never perfectly prices in what it perhaps it economically should. That’s why – for years – Wall Street didn’t seem to give any credit for the cash Apple was accumulating.
There are lots of companies who do buybacks and dividends and it seems to benefit those companies. But they’re generally not innovative ones. They’re generally at the top of their S-curved growth.
I believe the most important determinant of Apple’s stock price – two years ago and now – is how investors perceive the coming cycle of new Apple products. In my view, that’s what caused the 50% drop in Apple’s price two years ago (on a negative perception of that coming cycle) and it’s what’s caused the recent ramp up this year in the stock (on a positive perception). The dividends and buybacks are correlated with the stock’s rise recently but not the cause – in my view.
2. I think there are many tech-minded people who believe that the day your company starts paying a dividend is the day you say “I can’t think of anything creative to do with the money myself so I’m going to give it back to the shareholders.” Again, it suggests you’re at the top of the S-curve and you’re simply going to milk your profits from here on out.
There are lots of ways Apple could still grow. I think few who argue against that. I’d rather see Apple keep all its cash ready to attack those problems through R&D or M&A.
3. The Focus thing. For me to mention buying Tesla, Twitter, Pinterest, Yahoo, Dropbox, and Facebook in the post, I think it came across that I was arguing to do all those acquisitions and more big ones in the future at the drop of a hat. Any of those deals would have made financial sense but I recognize that cultural fit is important.
Apple might have looked at buying Yahoo 2 years ago. They might have believed it was attractive to own 40% of Alibaba years before folks were talking about it here and the potential ways Alibaba could help them in China, but they still might have decided against buying Yahoo because of the potential headache digesting 13,000 Yahoo employees who had been running on auto-pilot for years.
So, yes, cultural fit is important. And, yes, none of those companies might not have agreed to sell – like Zuckerberg. But Apple is still doing stuff in ads. They are focusing there. Either get in or get out of the pool. Do ads or not. And, if you’re going to do ads, you probably need some help. So acquire someone (else, because they’ve done some alread). You’ve got ample cash unlike any other company in the world so go for it. If you’re going to play around with Ping, go all the way with it.
Of all the potential acquisitions I suggested, I think the most interesting by far is Tesla. If I was Cook, that’s the first one I’d do. If it was the only one he did, I’d be happy.
I still think Twitter and Pinterest could also be huge assets in the future for Apple so I’d also grab them now at lower prices than what they’ll be in 5 years and I’d get to work on integrating them now rather than waiting and having more of an integration issue later.
4. Why did Cook choose to do the dividend and payout? I think that’s worth thinking about. Sure he was getting pressure from David Einhorn and Carl Icahn to do it but I don’t think either of those guys (who I respect) forced Tim to do it. I believe Cook thought Apple had way too much money than it could spend and this was a way to increase the stock price. He seemed to go out of his way when the stock dropped in 2013 to buy more stock to aid the stock price. I think he probably worried that a low stock price would hurt employee morale and retention. So, I think it came from a “it can’t hurt, only help” place for Cook. And, by the way, I think Cook’s a great leader and any one who’s read my stuff for years knows I defended him when others – who really knew nothing – were calling for his head.
However, despite this all coming from a good place, I think Cook simply misjudged what drives Apple’s stock price. It’s the product cycle, period. So, this $100 billion has been wasted and I think it could have been better spent.
5. Apple shouldn’t be doing big acquisitions every year. But they should be thinking “what’s the NeXT acquisition we could do today which would propel our company into a totally new and exciting vector that makes sense?” I think Tesla is it for reasons I’ve argued before.
6. People talk about Apple’s patience, its focus, its culture as things that have led to its success. They worry that doing a big acquisition might hurt Apple’s specialness.
I think it’s obvious Apple has a dominant bias to build vs. buy. That’s fine, but I think those biases – which have made it a very special company – can also sow the seeds of future mistakes. The concern I have with Apple is that it is missing a big transformational acquisition – Tesla for example – because it defaults back to these biases (that’s too big, we don’t do that, a thousand no’s for every yes) and misses a huge opportunity.
7. Maybe Apple’s worried about falling into an anti-trust trap with the government like has happened to Microsoft and Google. Maybe that’s the real reason they’re avoiding big acquisitions today. That’s fair. But I can’t see how a Tesla acquisition would concern antitrust regulators.http://www.forbes.com/sites/ericjackson/2014/11/27/apples-100-billion-waste-tim-cooks-single-biggest-mistake-as-ceo/2/