The topic du jour is why Apple (AAPL) has been notching new all-time highs yesterday and today. The stock closed today at $413.45, up $1.82, or 0.4%, and down a bit from the new high of $422.86 earlier in the session.
There’s been plenty of speculation, of course, including talk of Apple being added to the Dow.
Today I received a call from one bullish Apple investor, David Rolfe, the chief investment officer with Wedgewood Partners.
Wedgewood manages $1.1 billion, of which roughly 10%, or $100 million, is in Apple shares. Rolfe also heads up Wedgewood’s large-cap growth fund, the RiverPark/Wedgewood Fund (RWGIX).
I asked Rolfe why the stock was hitting highs, and he opined the “sweepstakes” on the sell-side that usually precedes Apple’s quarterly report is happening a little earlier, with analysts jousting to raise their targets sufficiently high.
Apple’s fiscal Q4 ends this month, and so the report would presumably be out in the first two to three weeks of October. There have, indeed, been some bullish analyst notes on Apple the last few days, as I’ve written, with another one out just this morning from Wedbush Securities.
“The sell side, with all due respect, had one of their worst misses of all time guessing last quarter,” says Rolfe. “Maybe they think to themselves, If my numbers are a little low [for Apple's results], what is the value to my clients if I bump up those numbers just days ahead of the report? I might as well raise the numbers now.”
Apple’s fiscal Q3 revenue did indeed come in well above estimates when the company reported on July 19th, totaling $28.6 billion versus the expected $25 billion. EPS blew away estimates at $7.79 versus $5.85 estimated.
But when I asked Rolfe about speculation that Apple might be considering a dividend or share repurchase, the question prompted a long and rather enthusiastic disquisition on his part about why that’s a bad idea.
Rolfe doesn’t think Apple will do either, for a long time, and he certainly hopes they don’t.
“We think Apple is doing something quite different with their cash horde,” Rolfe tells me. “We view it through the lens of endowment model, call it the iEndowment.” Apple had $76.2 billion in cash at the end of fiscal Q3.
Put simply, the enormous amounts of cash Apple will earn in coming years will give the company unprecedented staying power, he thinks:
They don’t need all that cash. But think of this in terms decades, in terms of the ultimate legacy of Steve Jobs. He is certainly the tech zeitgeist of our era. But he also has built Apple to survive for many, many years, many decades. What if they have $100 billion on the balance sheet in a year’s time, and, following the endowment model, they spend just 5% to 6% per year of that. That’s more than enough for them [to cover investment and R&D needs]. Now think about a couple years from now, when they have maybe $200 billion on the balance sheet. That would be maybe $10 billion to $12 billion per year they could spend. They have such an endowment if you will, so much money, it keeps them in the game forever. They could be swept away by some tech trend we can’t even imagine in the next 5 to 10 years. And if so, they could buy a company, or buy a collection of companies. It gives them optionality, in other words. If they decided social media is going to be a key part of things, they could buy Facebook. But it keeps them in the game like very few other tech companies.
I remarked to Rolfe that holding cash for forever, no matter how good the reason, is not generally a strategy investors like to see. Rolfe opines that if the stock price were to languish in the coming years despite cash continuing to build up, Apple could find other ways to mollify investors. It could even pursue a sort of nuclear option: LBO the company. (Cash gets so high it becomes most of the market cap, in other words, leaving little need for leverage.)
Rolfe does think that Apple’s CEO Tim Cook and his team could do a better job of explaining all that. He would like it if management just came right out and explained its philosophy about capital allocation and capital structure. He has had meetings with Apple face-to-face, and he hopes to bring up the matter with Cook & Co. at some point in the future.
But in the meantime, Rolfe thinks Apple’s business will continue to do just fine. The momentum behind the iPhone and the iPad is still unappreciated, he thinks. He thinks Apple can earn $42 to $45 per share next fiscal year, versus consensus estimates in the low $30s per share.
The P/E multiple on the stock is likely to contract, Rolfe tells me, because the market generally will continue to be skeptical of Apple’s growth prospects. He thinks the stock price won’t hit $600 by the close of 2012, even though that would probably be fair value. More likely, the stock will go to $550 or $575 by that time, he thinks.
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