How Should Apple Create Shareholder Value Now?

Michael Teague  |

Apple’s (AAPL) share price has experienced a precipitous tumble of nearly 35 percent since peaking in mid-September at high of $705.07 .  Questions of where the iPhone /iPad maker will go from here have been compounded by the fact that the company took in $23 billion in profits last quarter, bringing their reserve of cash to $137 billion, as well as the company’s recent announcement that it will be doing away with its preferred stock.  This has left many investors and analysts with doubts regarding the company’s ability to generate robust profit growth that Wall Street and investors have become accustomed to in recent years.

Last month, the firm Topeka Capital Markets released a note in which it recommended that Apple release “a much more significant return of cash” to its investors. This statement has now taken on a far more virulent and contentious life of its own thanks to Greenlight Capital founder David Einhorn, who on Thursday announced that he will be filing suit against Apple’s proposal to eliminate preferred stock.

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Immediately after announcing the suit, Einhorn hit the news circuit in order to justify his decision, saying, among other things, that Apple’s hoarding of cash was similar to the behavior of a trauma-survivor, using his grandmother as a specific example. Greenlight itself released a statement in which it highlighted Apple’s shrinking price-to-earnings ratio, despite the rather large amount of cash to which it is holding on.

Einhorn has been criticized not so much for the substance of his comments, with which many seem to agree, so much as his manner of expression; a dramatic and potentially inconsequential legal maneuver. On CNBC, Jim Cramer asked of Einhorn, “What the heck is he talking about?”, citing his “traditional investor” mentality, and emphasizing his preference for Apple’s growth through acquisition of a company such as Netflix (NFLX) or Twitter. Furthermore, Cramer suggested that if Einhorn did not like what he was seeing from the company, he should simply sell his stock.

For all of that, Cramer also admitted that “Apple’s position cannot be intellectually defended”. The same essential criticism has been echoed elsewhere as well, for instance by Yahoo! Finance senior columnist Michael Santoli, who was quoted as describing the lawsuit and Einhorn’s subsequent statements as “very contrived, very convoluted, but does get at the root of the problem, ‘what should Apple be doing with the cash?’”

The commotion comes as Apple faces much stiffer competition in both the smartphone and tablet markets, and the need to introduce new innovative products to serve as a catalyst becomes more pronounced.

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