Apple Problems


Staff Writer

What is the future of Apple?  Wall Street grows less enthusiastic about the company every day.  Since the release of the iPhone 5 in September 2011, the stock price has fallen from $702 to $440, and has found support at $474. 

Some analysts believe this drop in price is a result of Apple’s stagnant product development, but the real problems are Apple’s finances. Apple has an excess liquidity problem. They are holding $137 billion in cash on their balance sheet. 

This excess cash has prompted many shareholders to take action against the company. 

Greenlight Capital’s CEO David Einhorn is suing Apple and recommending that Apple issue $50 billion worth of preferred stock, which will be traded alongside the common stock and funded by operating cash flow, preventing dilution of the outstanding common shares. 

Apple’s second problem is their dividend.  In March 2012, CEO Tim Cook established a dividend, an action that Steve Jobs historically opposed.   

The dividend of $10 per share (2.3%), representing a small portion of its operating income ($51 billion in 2012), attracts investors, such as Einhorn, who are more concerned with dividend growth rather than future products.  

When a company begins to worry about quarterly earnings instead of future product development, the company will suffer a fate similar to Microsoft, who relies on their market dominance due to economies of scale, rather than thrilling customers with superior products. 

So should you invest in Apple? Yes.  Apple is one of the cheapest large cap stocks on Wall Street. 

It trades at 6.8 times earnings with a price to earnings multiple of 10, which is very low for a company of this size and success.  These numbers indicate hidden value and upside potential.  A downside example would be Netflix, who at their peak traded at sixty times  earnings leading to an 80% drop in value in 2011.  

Therefore, barring any further issues with shareholders, Apple, the largest and the richest company in the world, will invest its stockpile of cash, re-orient itself with its innovative vision, and pare their recent loses.