Are Apple’s Glory Days Over? (Answer: No) – Barron’s

Apple,

welcome to Microsoft‘s

world.

Last week, the two tech titans had what you might call a photo finish: Decent quarterly results, with double-digit growth in some product categories, but revenue that was a tad lighter than Wall Street had expected and profits only pennies better than predicted.

But the disappointment with Apple (ticker: AAPL) was substantially greater on Wednesday night, after it reported. Its shares fell as much as 11% in late trading, and ended the week down 12%, at $439.88. Microsoft (MSFT), in contrast, rose by 1% following its Thursday report and ended the week at $27.88, up 2.3%.

That is because Microsoft is no stranger to disappointment, whereas Apple is. Microsoft has for quite some time now been pestered to do something with its cash pile, as its shares have generally languished. The 10-year appreciation in share price for Microsoft is 12%, vastly trailing the S&P 500’s 63% move up over the same span.

Microsoft’s cash totaled $68 billion at the end of the fiscal second quarter. We’ve written in this space about how investors and analysts have suggested that the software maker borrow against that cash to increase its dividend dramatically or do much larger buybacks.

And now some of the same calls are hitting Apple, and will continue to do so, as the Street concludes that the era of amazing quarterly surprises is over (see “Rx for Apple: The 4% Solution”).

Apple’s revenue in the year-earlier December quarter beat the consensus forecast by a whopping 18%, followed by a smaller but still impressive 6% in the March quarter of last year. It then went on to record a miss of 6% in the June quarter and beat expectations by a hair in September.

Following last week’s revenue miss, FBN Securities’ Shebly Seyrafi on Thursday morning declared: “Apple’s glory days are now behind it.” (And that’s the view from a bull, mind you.) If that’s true, as many seem quick to believe, it leaves Apple open to the kinds of scrutiny of its cash that has plagued Microsoft for a long time.

Apple ended the quarter with $137 billion in cash and investments, more than the GDP of many nations. (About $94 billion of this is overseas and would be taxed if repatriated, so some borrowing by Apple might be necessary.)

Jeffrey Gundlach, the bond expert at DoubleLine Capital, who has repeatedly called for a retracement of Apple shares from their 52-week high of $705.07 to what he considers fair value around $425, appeared on CNBC Wednesday night, almost immediately after the report.

Gundlach made the bear case for valuation, succinctly, stating that although the stock appears cheap, “what’s the multiple on cash? It’s supposed to be zero, right? So, if you’re betting that they’re going to do something brilliant with it, you’re taking a pretty big leap of faith.”

With the passing of founder Steve Jobs, Gundlach was perhaps only half joking in suggesting that Apple has enough money to build Noah’s Ark—his way of saying inventiveness has left the building in Cupertino.

Late Friday, Gundlach told Barron’s: “I certainly think AAPL has a challenging future if it hopes to keep up with the successes of the recent past.”

The 37.6% drop in the past four months in market value of what had been the world’s largest company—Apple relinquished the title to Exxon Mobil

(XOM) Friday, a year to the date it assumed the mantle—is increasingly frustrating investors, so much so, many believe, that the company must give back a lot more to shareholders.

Apple could have, for example, removed the sting of Wednesday night’s report with an increase in its quarterly dividend from the current $2.65 per share, a 2.4% yield. That’s not bad, and it’s certainly better than it was when the stock was at $700, but it pales beside the 4.3% yield on Intel‘s

(INTC) shares. Even Microsoft’s long-criticized yield is 3.3%.

Apple could have boosted its share buybacks, too, on which it spent just $2 billion last quarter. Apple’s chief financial officer, Peter Oppenheimer, responded to inquires about the cash Wednesday night by saying that the company will return a total of $45 billion to investors over the next three years in dividends and buybacks.