Apple Inc (NASDAQ:APPL) is what may be considered an emotional stock. Or, perhaps more accurately, many of the people who buy and sell Apple over-react to positive or negative news about the company’s fortunes.
Virtually anyone who has owned Apple these last three decades – as I have – is quite well aware of the wide swings in its price. But you already knew that.
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Indeed, if there’s one stock that has been over-analyzed, that’s Apple. There are very knowledgeable people who have been tracking the stock for years, and some have been right much more often than they have been wrong.
But apparently, few have been paying a whole lot of attention to one of the stock’s three key variables. They are fixated on price, which of course, is a key variable – and admittedly the most important.
They also are very conversant with market capitalization. Indeed, last year, when Apple became the first American corporation to reach a capitalization of over one trillion dollars, the only question left was: Which company would be next?
Now, in most endeavors, two out of three ain’t bad. But, at least in the long run, when it comes to stocks, we really need to keep our eye on all three key variables.
So far, we’ve talked about the price of Apple stock and about its market capitalization. But very little is ever said about its third key variable – the number of shares of Apple stock that are outstanding. In other words, how many shares are in the hands of its stockholders?
Now, if that happened to be a fixed number – say five billion shares -- then you really would not need to read any further. But it’s not. It’s a very big number, but it’s been falling fairly quickly over the last six years.
You’re probably aware of the company’s long-term stock buy-back program. In Table 1, you’ll see just how well that program is working out.
Now let’s do a little math. We can calculate the current stock price of Apple by dividing its market capitalization, about $800 billion, by the number of outstanding shares, 4.72 billion. I’ll leave that calculation to you.
What did you come up with? Just about $170, right? Which, of course, is just about what Apple is currently selling for.
Now, let’s consider the company’s stock buy-back plans in the foreseeable future. Considering that the company still has a huge cache of cash – perhaps $250 billion – it certainly has the ability to keep buying back shares at the same pace. And then too, since Apple is trading at about $60 below its $233 peak last fall, it seems likely that management will want to keep backing back shares at relatively low prices.
Let us say, just for the fun of it, that eventually the number of shares outstanding were to fall to 4 billion. If the market capitalization were to remain exactly the same -- $800 billion – go ahead and calculate the stock price.
That’s right – it would have risen to $200. And now, to carry out this logic to its almost absurd conclusion, what if the market capitalization remained at $800 billion and the company had bought back all but one share of Apple stock? How much would that share be worth?
You got it! It would be worth $800 billion.
The point that I’ve been trying to make, of course, is that over the last six years Apple’s management has been buying up huge gobs of its shares. And that that stock buy-back was a huge factor in the rise in the price of Apple’s stock price.
The company will apparently continue, at least in the foreseeable future, to buy up hundreds of millions of additional shares. Is there any limit to how much they would be able to buy? Yes!
If the company faced a long period of declining profits, that would clearly put an end to their buying spree. Could that happen? Yes, it could!
But if history is any guide, then that eventuality – and least in the near future – seems rather unlikely. Let’s look at the record shown in Table 2.
Especially since the introduction of the iPhone in 2007, the company has had some relatively fat years as well as some lean years. Indeed, fiscal year 2019, which began last October, has been shaping up as a lean year. But even so, the company will apparently continue its vast stock buy-back program.
As long as the number of shares outstanding keeps falling at its current pace, that will exert considerable upward pressure on the price of Apple shares. So you would do well to keep your eye on the number of shares outstanding whether you’re thinking of buying or selling Apple.
Full disclosure: I own Apple stock.
About the Author:
Steve Slavin has a PhD in economics from NYU, and taught for over thirty years at Brooklyn College, New York Institute of Technology, and New Jersey’s Union County College. He has written sixteen math and economics books including a widely used introductory economics textbook now in its eleventh edition (McGraw-Hill) and The Great American Economy (Prometheus Books) which was published last August.