Apple Inc, going for free within 8 years

Fancy owning Apple Inc, the entire company, for no money down? Well if the current share price level doesn’t go any higher, in less than 8 years time someone will be able to pick up the company effectively for free.

Let’s get the facts out of the way:

As I write this, Apple stock is trading at a stock price of approximately $97 per share.

It has a Market cap of approx $540 Billion, and a net cash balance of $153 Billion.

Using the Market Cap & Net cash figures, we come to an Enterprise Value (EV) for Apple Inc of approximately $387 Billion, that is the value of the company after its net cash balance has been subtracted from its Market Cap.

Over the past two financial years, Apple has returned capital to shareholders by way of share buybacks & dividends. The average amount spent on buybacks over these last two years is $40.5 Billion per year.

During this period Apple has also grown its net cash balance by an average of $5.5 Billion per year. In other words despite its massive spending on buybacks and dividends it still grows its cash pile each year.

What does all this have to do with getting Apple inc for free? Well let’s do some simple math.

If the share price doesn’t increase, and the Apple buyback & cash accumulation continues as it has, then this is what happens over the next 8 years:

2016: $344 Billion EV & $158.5 Billion Net Cash

2017: $298 Billion EV & $164 Billion Net Cash

2018: $252 Billion EV & $169.5 Billion Net Cash

2019: $206 Billion EV & $175 Billion Net Cash

2020: $160 Billion EV & $180.5 Billion Net Cash

2021: $114 Billion EV & $186 Billion Net Cash

2022: $68 Billion EV & $191.5 Billion Net Cash

2023: $22 Billion EV & $197 Billion Net Cash

Approximately halfway through 2023/24 the EV reaches zero, and the company market cap falls below its net cash figure. Technically at this point anyone wanting to own the entire company would be paying a price equivalent to its net cash balance – essentially getting the company for “free”.

2024: -$24 Billion EV & $202.5 Billion Net Cash

2025: -$70 Billion EV & $208 Billion Net Cashthe 

2026: -$116 Billion EV & $213.5 Billion Net Cash

2027: -$162 Billion EV & $219 Billion Net Cash

2028: -$208 Billion EV & $224.5 Billion Net Cash

At some point in 2029 Apple Market cap falls to zero, or perhaps $97 – as whoever owns the last share technically takes full control of the company (a company with $230 Billion in net cash!).

The point of this post is not to suggest Apple will in reality reach a zero EV (or less). instead it is to point out that the likelihood of the Apple share price staying where it is (or dropping), is a very unlikely scenario given the current buyback activity. Sooner or later it is going to have to rise significantly.



In Defence of a Beats Acquistion

Yesterday, News broke that Apple was in discussion to acquire Beats Electronics, vendor of premium headphones & a streaming subscription music service.

Here are my compiled thoughts on why this acquisition is positive. Most of what is written here are opinions I wrote shortly after the news broke yesterday, and after reading lots of opinions on the matter since, my thoughts haven’t really changed.

1. Beats revenue growth is fantastic, in a market that Apple essentially hasn’t entered.

No one has anything but estimates, but even the lowest figure for 2013 revenue at Beats was more than a Billion dollars. This represents massive growth in a short period from only a few hundred million a couple of years earlier. Everyone is aware that Beats headphones are very high margin products, in fact thats what its detractors often bring up as a negative. High Revenue growth for a company with a high margin product sounds like a very good investment, and something that is worth a higher than average market multiple. Its important to note that Apple isn’t really in the same market as Beats either, whether we are talking about premium headphones or multi platform subscription music.

2. The Beats Business would be far more profitable operating under Apples wing.

The Beats business would achieve even higher margins operating under Apple than it does now – it would no longer require distribution, legal, accounting & financial departments – and its manufacturing operations and supplier agreements are likely to get much better deals as part of Apple. Beats sits so nicely into Apples operations that the company is simply worth more to Apple than to almost anyone else.

3. The Beats brand is valuable.

Beats is THE choice for the vast majority of consumers who want a premium pair of headphones. Despite what Audiophiles will say about its products, the overriding factors for most premium headphone purchasers are Brand & Design.

4. Beats headphones & streaming products are good. Apple kind of sucks at music sometimes.

Apple undoubtedly had huge hits with the iTunes music store and of course the iPod, but lately it has sucked at new music innovations (no one can deny how bad the iPod HiFI & Ping music social networks were before being rightly killed). It has also failed to launch a streaming music product years after it was obvious consumers were moving in this direction, as a result iTunes music revenues are now in decline. Beats on the other hand has arguably the best streaming music product out there, with its curated approach for users. Apple also didn’t enter the growing premium headphones market – which is now what retailers call a “destination” product, rather than a “peripheral”. in other words people seek out and go to stores to buy premium headphones, they don’t simply buy them only when buying a new smartphone or iPod. Beats on the other hand has taken a lead in this market.

5. Beats is (probably) the most profitable Android Phone Accessory vendor.

Beats headphones (and portable speakers) are very popular with music fans who are Android owners, not just iPhone owners. Being that they have such high gross margins, its quite likely that if Apple bought beats it would also happen to become the most profitable vendor of Android premium headphones. Other than premium headphones, are there any other high margin android accessories that ship in large numbers? maybe phone cases, but is there one dominant case maker I’m not sure. Regardless, this is one way for Apple to monetise Android users. If someone buys a samsung galaxy and buys a pair of Beats headphones to use with it, Apple would likely make more profit than Samsung.

6. Beats Music Streaming App gives Apple an instant beachhead in expanding iTunes revenue to Android users.

While the Beats Headphone business gives Apple some hardware revenue from Android users, The Beats streaming music App provides Apple with an instant beachhead into Android to sell music. The potential to sell a billion android users streaming music, downloaded music (& potentially video content in the future) is just as big an opportunity to build iTunes revenue as the billion windows users were 10 years ago when Apple launched iTunes for windows.

7. Beats Music possibly gives Apple streaming music agreements with all the major labels.

Apple doesn’t have a subscription music product. something is holding that product up. it presumably isn’t technology, so it likely is contractual negotiations with labels. If acquiring Beats provides a quick resolution to that hurdle then its just another reason to do it. Again this is another reason why Beats might be more valuable to Apple than to other potential suitors who either have their own subscription services already or simply have no need or desire to have one.

8. Beats provides additional high margins products with a potentially good attach rate – perfect for Apple Retail.

With Angela now in the loop and ready to shake up retail, adding a desirable Prremium High margin product to showcase to and attract store visitors is a win.

9. Jimmy Iovine & Dr Dre would be good additions to Apple.

They know music. They know youth. (Apples executive & board bio page is 95% middle aged white guys, probably not the type to be on the cutting edge of youth culture).

10. Critics of the Beats business model sound EXACTLY like critics of the Apple business model.

“All Beats is is clever marketing and overpriced inferior products!” Sound familiar?