'Apple Is Potentially Facing A Very Rough Two-Year Period,' Says Jefferies
Apple should not sign up for hedge fund manager David Einhorn's preferred stock plan, says Jefferies analyst Peter Misek.
He thinks Apple is going to need its cash to ride out a "potentially very rough two-year period." He prefers dividends and buybacks because they provide flexibility.
Einhorn wants Apple to issued preferred stock that has a perpetual dividend. He has scolded Apple for having a "depression-era mentality" when it comes to cash. He thinks Apple needs to stop hoarding its $137 billion in cash, and start distributing it to shareholders.
Misek sees some big issues confronting Apple in the near term that will require lots of cash on hand:
Capex is likely to double in the next two years, costing an additional $10 billion a year. He thinks Apple is switching to TSMC for chip making, and it will have to finance much of TSMC's operations to support the output Apple needs.
Apple will need cash for iCloud and data centers.
An Apple TV could require Apple to pay more for premium content.
Apple may have to do financing for iPhones in developing markets. Misek explains, "In the hypothetical scenario where all international iPhones were financed by Apple, we believe Apple's cash balance would take a hit of ~$10B due to the company having to cover upfront manufacturing costs and ~$40B of cash collections would be deferred over the next two years. We believe this could affect international markets where pre-paid is more popular and installment plans are being tested."
Improving knock-off phones in China are a threat. We're not sure what to make of this, but Misek says there are "white box" phones that are clones of popular Samsung phones selling for $130-$200. Apple's iPhone costs 4X that. To compete with these phones, he believes Apple will have to do something that could put pressure on the cash.
Basically, Misek agrees with Apple's position on cash.
He sees a turbulent period in the near term and doesn't think Apple should sign up for anything that gives away cash forever. He thinks Apple either doubles its current plan to $90 billion in dividends and buy backs over the next three years, or keeps its current $45 billion in dividends and buybacks, but does it over the next year and a half.
If AAPL had a brain, they would spend 50 billion and buy 40% of INTC. This would give them enough seats on the bod to make sure INTC fabricates what they want and if another tech process comes along, they can sell the INTC shares and move on. This gives them access to state of the art tech at little or no cost to them.
Common sense says to hedge at least
Supposedly Cook is a supply chain guy...
what did Apple do - they procured EVERYTHING from ONE source: Samsung...processor, NAND, LPDRAM and screen - (probably because Samsung gave Apple a package deal).
Finally Apple diversified.
Only 12 months ago the IPad came out with 45nm chip...well things changed rapidly didn't they.
The ARM attitude was that chip supply is something you buy off the shelf without having to worry.
In case Apple ends ups financing TSMC what about the other fabless TSMC customers...are they becoming second tier?
Hah, Apple going with TSMC?? Apple prides itself on building the most innovative products and it settles for a second rate chip builder? What a riot. If that happens, truly Apple is finished. TSMC will always be a node or more behind. TSMC hasn't even mastered 3D transistors wait till Intel pushes below 10nm then TSMC will really be wetting themselves trying to make EUV work.
Apple has to think long and hard before it commits billions of dollars in capex to finance operations at TSMC not knowing when they will be able to do Finfets/3D, 22nm, 14nm, etc.
If Apple goes in with TSMC entirely and the new technologies don't materialize, Apple will find its entire market dissipate to companies which bet on Merrifield, Bay Trail, and their future evolutions. And Apple will become a tottering company that it was in the 1990s. Any CEO that makes such a wild bet will be failing in their fiduciary responsibility to their shareholders.
Apple is not the risk taking company that it used to be. These days they prefer the safe, incremental moves rather than the bet the farm Steve Jobs leaps of faith.
I expect to see this risk reluctance to come into play in Apple's choice of fabrication partner going forward. When it comes to fabrication, Apple is already in a high-risk situation. Using Samsung means giving business to their prime competitor. A situation that has already led to a parcel of lawsuits. Using TSMC means exposure to a foundry that struggled with ramping 28nm and that won't have 20nm production soon enough to demonstrate reliability in the face of Apple's huge demand.
To insure the presence of a reliable supplier with state-of-the-art technology and a roadmap reaching far enough into the future to justify the enormous costs of changing fabs, there is only one low risk choice.
And that is Intel. This reluctance to take excessive risk is the reason I believe that we will see Apple strike a deal with Intel in the next 12 months.
I also think there is a fifty-fifty chance that the iWatch will be the early indicator that a much larger deal is taking shape...