Very good explanation. The basic idea that Apple could either give me a couple of bucks every so often, and I can turn around invest that wherever I see the best return, or they can keep it and make my existing investment grow a little bit more.
There's one caveat though -- Apple already has a lot of trouble putting all of that cash on hand to work. I'm sure they wish there was some other company performing as well as they are, so they could buy it up and watch a $40B investment grow instead of $40B in the bank not grow (or grow at the rate of a safe harbor investment of some sort). A buyback might make sense as an investment, but the share price is already quite high compared to all of their competitors except for google.
You're overlooking a few things here.... having a tremendous amount of cash is good insulation. Not only does it help buffer them against all types of potential litigation that might otherwise put a dent in operating cash rather than retained earnings, but it also gives them plenty of wiggle room for advertising, R&D, and strategic acquisitions when they arise. Companies that are fairly short on cash suffer much more volatile swings on their P&L statements and end up incurring interest expenditures that can balloon to a point where they can't dig themselves out of debt. They can also use some of that cash (and they do) to acquire tremendous volume discounts on materials and third party components, and even lock up a particular supplier for months to come.
And finally, there's the boost to the book value of Apple... which in and of itself is huge insurance against any kind of hostile takeovers or leveraged buyouts. The fact that they have all these insulations against incurring interest expenditures makes their net cash flows that much larger.
And the truth is they are spending operating cash... a quick look at their cash flow statements reveals that they've spent much of last year's operating cash as quickly as they got it, mostly on strategic acquisitions. Could they make more acquisitions? Sure but there are only a handful that will mesh well with their strategic long term goals and Apple's DNA... the more they foray into weird acquisitions that don't make sense, you have to remember that once they make the acquisition they then have to manage that business... and that can pose risks that simply aren't worth it.
Another thing is that by tying it up in overseas investments, there's a tremendous amount of tax they've deferred that would otherwise be incurred... It might be why they've made some strategic acquisitions now because if the choice is between reinvesting versus cashing that out, cashing out costs them more than what they're likely to gain from strategic acquisition or simply keeping the cash and equivalents earning them a pretty sizable return (in dollar volume)... and a relatively risk free one at that (though there is some currency risk here and there, but that evens out if they're not planning on blowing $80 billion in the immediate future.
Regarding the valuation of $386/share, there's something more to Apple beyond it's p/e ratio and the other factors that contribute to a 'by the numbers' valuation. That is to say, its market value has exceeded its intrinsic value for a long time, and consistently so.
Aside from the fact that I never use P/E ratios (totally meaningless but they are easy calculations that make the average analyst/broker sound more intelligent than they are) in my valuation (I'm almost strictly triangulating between DCF-based terminal and intrinsic valuations that take me maybe 15 minutes tops), Warren Buffett used to say "Price is what you pay. Value is what you get."
To arrive at a sensible price as to what you *should* pay for an asset is something you have to figure out independent of what every other yahoo is willing to pay. The market, quite simply, has a lot of speculators... and that doesn't mean one should be as quick as them to run out and make a foolish move. I'm not saying Apple doesn't have any upward room but... that might be one or two puffs of the cigarette. That's not an investment. That's speculation... I treat every transaction as though I were acquiring the business whole, because institutional buyers who have the power to drive market price and directionality are playing the same game. They're waiting for speculating shucks to overpay for that asset... and there's enough of them to create a lot of liquidity at levels above intrinsic value, but how does that assure me a profit? Simply put, I'm assured a much larger profit if I look for underpriced companies for which the market hasn't yet gotten wise to their true value, but may at a later date... If they meet all my criteria, then I determine just how much risk exposure is sensible given how much of a margin of safety there is (the amount below intrinsic value at which the security is currently priced) ... to insulate myself against any kind of catastrophic loss.
This is the same philosophy that made billionaires out of Warren Buffett, Walter Schloss, Jean-Marie Eviellard and many other value investors... and they're happy to sell to suckers who think that the market is actually right all of the time. My basic philosophy is to not be on the losing side of that equation.
Regardless of whether you personally happen to be an Apple fan or not, it's undeniable that there's a lot of emotion (positive) and loyalty associated with the brand and the products themselves. It's probably because of this reason that the stock has consistently stayed well above its book value, despite people making the same argument as the stock hit 200, 300, 400, etc...
I'm a fan of Apple... but I'm also a pragmatist and a business valuation expert. I understand what you're saying but as I stated above, I'd rather buy when it's undervalued and then sell to the fool willing to pay more than its worth and turn a much bigger profit than if I had taken a puff or two off an already overpriced stock. There are many, many other opportunities out there every day... and I've already seen what happens when people confuse speculation for investment. I made a fair amount of money off Apple and I exited at a price I feel pretty comfortable was the right place to exit.
The reason Apple went to 200, 300, 400.... remember that as the business grows so too does book value, but if you've been keeping an eye on their performance the lead is actually narrowing. Apple was trading in the past two years at as much as nine times their book value. They're now closer to 5 times book value... and slightly above their intrinsic value (book value + enterprise value or NPV of DCF looking ten years forward). This makes sense to me because their operating cash flows are starting to flatten. When you take that into account and the fact that every year of double digit growth reduces the size of the market that they've not already sold products to, and the pipeline of products approved with Jobs' personal involvement, you've got probably four years before growth decelerates to a terminal value.
Could that be wrong? Sure, but investment means erring on the side of risk aversion rather than blind risk taking... because if you constantly chase after huge returns (which carry the risk of huge losses on the other side), and you gamble big on them, you'll keep wiping out your principal balance, which is a lost opportunity to enjoy the fruits of compounding interest over time. Any number times zero is still zero.
Excellent reading material in this regard is The Intelligent Investor by Benjamin Graham, Buffett's mentor. In fact, it's worth noting, because the entire practice of reinvesting rather than paying dividends was probably influenced by the triangle between Jobs, Gates and Gates' philanthropic partner, Warren Buffett. Berkshire-Hathaway has not paid a dividend since 1964, and they have grown their book value consistently at around 20% annually compounded per year for forty years, without splitting their Class A Common shares, which are currently trading at around $117,000 per share... or about 1.15 times book value. The pricing keeps the stock away from speculative volatility and much closer to a respectable fair market value... which is much more attractive for serious long term investors who don't treat the stock market as their personal casino.
