Author: Chris Umiastowski

Being the world’s largest technology company has its perks, including a stream of almost limitless cash. But the law of large numbers also starts to kick in, and a company of Apple‘s size doesn’t seem capable of doing super productive things with all this money.

Tim Cook seems to be implementing an intelligent two-pronged strategy to use the cash. Part one is to return some of the cash to shareholders. Apple now pays a healthy dividend of about 2{813a954d5e225a1509f22204ece89c855080ce25555f20805f61bed63cbfde3b}, or $1.88 per year. They’ve also bought back a bunch of stock. Buying back your own stock is effectively the same as returning money to shareholders because the buyback decreases the number of shares outstanding. The reduced share count means that earnings per share (EPS) goes up. When EPS goes up the share price usually follows.

But Apple’s stock price is up 77{813a954d5e225a1509f22204ece89c855080ce25555f20805f61bed63cbfde3b} in the last 15 months, as explained by Bloomberg. Apple seems to have great timing. The stock climbed more than 25{813a954d5e225a1509f22204ece89c855080ce25555f20805f61bed63cbfde3b} after the early 2012 share buyback, and another 32{813a954d5e225a1509f22204ece89c855080ce25555f20805f61bed63cbfde3b} following the 2013 buyback.

We should have expected at least a small percentage gain driven by the mechanics of the buyback (and the resulting EPS increase), but Apple actually seems to have a really good handle on when its stock is worth buying. Investors often look at stock buybacks as a signal of confidence from management. But sometimes management holds onto unrealistic, unsupported confidence. Not all C-level management teams know how to time their own stock. Cook and team certainly don’t seem to have this problem.

The second strategy seems to be vertical integration. As Fortune explain , Apple is continuing to act in keeping with Steve Jobs’ desire to control the primary technology behind everything they do. Over the past few years Apple got a lot of attention for its successful use of ARM-based chips in iOS devices. And now this week … Apple has flipped the switch on its own gigantic content delivery network (CDN).

What does it mean, long term, for Apple to have its own delivery mechanism for content? Could it be meaningful for Apple to escape its past reliance upon Akamai and Level 3? I’m honestly not sure. But I think if Apple feels it needs to spend $100 million (so far) building this network, there must be a bigger picture reason beyond the distribution of iOS and MacOS updates. Otherwise they could equally well argue that they need to own Tesla Motors so their employees can safely get to and from work. There has to be something more to this … something that is expected to scale to such a degree that Apple really wants to control the technology all by itself. Let the speculation begin.

Apple is a giant, and it’s nice to see that the company is making good strategic use of its capital.

Venture capitalist Fred Wilson spoke at the TC Disrupt conference in NYC and TechCrunch wrote a quick summary of what he said. Apparently Wilson thinks that by the year 2020 Apple won’t be a top three tech company. I assume he’s talking about market capitalization here, and currently Apple is the most valuable technology company in the world based on that metric. Wilson suggests that, instead, Google and Facebook will be in the top three along with another new name we haven’t heard of yet. His logic? Apple is “too rooted to hardware”, which is “increasingly becoming a commodity.” Furthermore he’s a big believer in the cloud and says, “Their stuff in the cloud is largely not good. I don’t think they think about data and the cloud.” So, is Wilson right?

I can understand Wilson’s prediction that Apple ceases to be #1. After all, Facebook and Google are very powerful businesses, and they are both incredibly strong players in mobile advertising. I believe the advertising industry is now in the midst of a huge shift in spending away from radio and print and towards online, especially mobile. Just a few quarters ago people thought mobile traffic wouldn’t easily be monetized. Today Facebook brings in 59{813a954d5e225a1509f22204ece89c855080ce25555f20805f61bed63cbfde3b} of ad dollars from mobile users and Twitter brings in 78{813a954d5e225a1509f22204ece89c855080ce25555f20805f61bed63cbfde3b} from the same segment. Mobile is huge.

If hardware does get commoditized further and Apple continues to rely so much on hardware, they’ll suffer. But we have to remember that Apple isn’t a hardware company. They’re a product company. And the difference is important to understand.

Apple may seem to be a hardware company on the surface, especially based on their financials, but they have a massive commerce business with iTunes, apps, and more. Apple’s iTunes business is so big that, if split off, it too would be a major tech company — #130 on the Fortune 500 according to Horace Dediu of Asymco. This business is growing and will continue to grow.

Additionally, I think Apple has proven its ability to manage a long term trend towards cheaper hardware (desktops, notebooks, MP3 players) while still selling premium priced products at high margins.

But I do see Wilson’s point about the cloud. Apple can do so much more. They talk a big talk. Tim Cook says that iCloud is Apple’s strategy for the next decade. But they haven’t really done much with it yet. I still feel like I can’t trust iMessage to deliver messages so I use Voxer, Skype and BBM. iCloud still doesn’t even have the most basic file organization capabilities. I would seriously love it if Apple provided me with enough space, at competitive prices, to back up all of my iOS devices and photos.

Even still, I think it’s a massive exaggeration to suggest that Apple doesn’t think about the cloud. Clearly they do, but they haven’t been on top of their game when it comes to execution. I can understand the argument that Apple’s cloud folks perhaps are not the best in the business. They’re not as good as Dropbox or Amazon or even Microsoft (gasp!)

Can Apple stay on top? This week the stock crossed back over $600 briefly. The market value of Apple is over $500 billion. Google is worth $347 billion and Facebook is worth $150 billion. If Fred Wilson is right we should all be buying Google and Facebook while shorting Apple stock. I’m with him on the former (I am long both stocks), but there’s no way I’d be shorting Apple here.

I’m still pretty bullish on their long term growth.

Rumors of a 13-inch iPad Pro were once again making the rounds this week, amped up by talk of a 4K Retina display. I have absolutely no idea whether or not it will ever become a real product, but I’ll happily go on record saying I don’t think 4k resolution makes a lot of sense for a tablet. It’s possible someone might put one out, and it’s definitely possible that there is a market for one, but I don’t think it’s possible for such a product to financially matter to a company like Apple in 2014. Personally, I think Apple could get more bang for the buck if they opened a game store for the Apple TV.

The $99 Apple TV set top box (we have to stop calling it that considering how small it is) is already compelling for YouTube, iTunes, and Netflix access. Add iOS games to the mix and bring forth some bluetooth controllers and I think we’ll see Apple TV volume explode by an order of magnitude.

If we look at comments made by Tim Cook in 2013, they had an installed base of about 13 million Apple TV devices and were on track to sell about 7 million per year. I suspect this pace has already accelerated, and I look forward to Apple reporting an update after the holiday season. So what if they can ramp that up an order of magnitude by making the device way more useful? What if Apple can sell 50 to 100 million units per year? Priced at a hundred bucks, even 100 million units only translates into $10 billion in revenue, which moves the needle very little on a total top line of close to $200 billion.

But I’m much more interested in what Apple can do with that kind of Apple TV volume. Can they leverage their way into content delivery? Can they take on Netflix (or buy them)? Can they roll out new money-grabbing services?

It seems to me the Apple TV is the product with the most potential over the next year, aside from any secret new product categories we don’t know about. It has all the potential of iOS yet, so far, none of the product polish that Apple is really known for. Enhance the remote. Slick-up the user interface. Maybe put a camera in it for video conferencing. Allow iPods, iPhones, and MFi to connect in for multi player games. Sell us access to sporting events where we use our handheld device to pick from multiple camera angles or replays. If you can’t work with the cable companies, make them obsolete.

I’m not that creative, and I’m sure Apple has even better ideas then this. But it seems to me, rather than simply making bigger screen iOS devices, making the big screen more useful offers a ton of upside for Apple.