The Above Avalon Daily Update Recap (January 2021)

Along with publishing periodic articles that are accessible to everyone, I publish daily updates all about Apple. These updates are 2,000-word emails that revolve around Apple business and strategy analysis, my perspective and observations on current news and Apple competitors, and comprehensive coverage of Apple earnings, product events, and keynotes. These daily updates have become widely read and influential in the tech sector and Apple universe. The updates are now also available in podcast form called Above Avalon Daily.

Since 90% to 95% of my time is dedicated to researching and writing the daily updates and recording the corresponding daily podcast, I am introducing a new Above Avalon product called The Above Avalon Daily Update Recap to make it easy for everyone to keep abreast of where my focus has been. Each curated recap of the prior month’s updates includes access to one story from a daily update that I particularly enjoyed writing in the previous month.

The daily updates are available exclusive to Above Avalon members. To sign up and for more information on membership, visit the membership page.

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The following story was featured in the Above Avalon Daily Update published on January 14th, 2021 (prior to Apple reporting 1Q21 earnings).

Projections for Apple’s Buyback Pace

Apple has $79B of net cash on the balance sheet. By funding share repurchases and cash dividends, Apple has been gradually chipping away at that total (was $153B in FY17).

Based on my projections, Apple will be able to sustain the current pace of share buyback (approximately $70B per year) for an additional 11 to 13 quarters before net cash gets close to zero.

Where does my 11 to 13 quarters estimate come from?

There is a $25B delta between the amount of cash Apple is returning to shareholders each year ($90B) and annual free cash flow ($65B) - the amount of cash generation leftover after management has paid all of the bills and maintained / funded capital investments. Free cash flow is used to manage debt in addition to fund cash dividends and share repurchases. Meanwhile, Apple has $79B of net cash on the balance sheet. ($79B / $25B = 3.2 years or 13 quarters).

It is important to note that these are rough calculations. Apple’s cash needs will fluctuate year to year. This will have an impact on Apple's free cash flow. In addition, it would not be essential to know the exact moment net cash neutral is obtained, if Apple ever technically gets to that level, but rather when net cash is in the vicinity of $0.

Once Apple reaches a net cash neutral position, my estimate is Apple’s buyback pace will slow to something closer to $50B per year. This total is primarily derived from my Apple free cash flow projection ($70B per year) minus cash dividend expense ($15B per year). Over time, Apple's buyback pace can certainly increase to remain in line with free cash flow growth. The reverse is true as well - a slowdown in free cash flow may result in less buyback.

These estimates assume that Apple management continues to view share buyback as attractive at the current share price. That decision will ultimately be based on management's estimate of Apple's intrinsic value. Based on Apple's most recent buyback activity, management thinks Apple's intrinsic value is higher than $115 per share.

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In January, a total of 15 daily updates containing 45 stories were published. Those 45 stories have been rearranged into the following categories:

Earnings / Financials

• My Apple 1Q21 Estimates, Wall Street’s Expectations, The Apple Number to Watch (My Apple 1Q21 earnings preview)

• Apple Earnings, The Most Important Apple Number, Apple Remains Misunderstood (My Apple 1Q21 earnings review)

• Apple Stock Buyback Debate (Continued)

• Apple Discloses Key App Store Financial Data Point

Product Strategy

• iPhone Activation Data (Christmas 2020)

• An iPhone 12 Mini Problem

• Selling a Smaller iPhone

• Thinking About an iPhone SE (3rd Generation)

• Apple Podcasts+ Looking Likely

• Apple Launches Time to Walk Audio Workouts

• Apple’s Secret Weapon for Fitness

• Apple Extends TV+ Free Trial (Again)

Business Strategy

• How Much Is Apple TV+ Costing Apple?

• Apple Continuing to Poach Tesla

• Apple and Tesla M&A

• Apple Held Talks With Canoo

• Apple Removes Parler From App Store

• Apple’s Content Distribution Arm

• Hyundai Confirms Talks With Apple

• Apple Considering Car Factory in Georgia

• Making Sense of Apple and Hyundai News

Management / Leadership

• Apple Announces Executive Changes

• Dan Riccio and Design

• A New Apple Succession Trend

Apple Peers and Competitors

• Microsoft Earnings

• Netflix Earnings

• Peloton’s Marketing Shift

• Peloton Buys Precor

• Tesla and First Movers

• Musk’s Apple Tweet

• Tesla 4Q20 Deliveries

Industry Analysis

• Censorship vs. Curation

• Big Tech and Collusion Allegations

• U.S. Senate on Track to Flip

• Engagement Is Key in Video Streaming

• Peloton vs. Apple

• Gazelle Ends Trade-Ins

Thursday Q&A (The following questions were submitted by Above Avalon members.)

• You previously mentioned that owning car factories would become a liability in the future. Can you go into that in more detail? What did you mean when you wrote “to truly rethink the car, look at the car seat”?

• Will the auto industry become more like the TV space where there are many different players each with a small share of the market or will we see something more like the smartphone space with a few big players?

• Now that Google has completed their acquisition of Fitbit, what are the chances that Google introduces their answer to Fitness+?

• Doesn’t Peloton make more sense as a health acquisition target for Google than Fitbit?

• How do you reconcile Flurry’s data pointing to iPhone 11 outselling iPhone 12 by a wide margin with CIRP saying iPhone 12 is outselling iPhone 11 by a similarly wide margin?

• Are you still expecting double-digit iPhone unit sales growth in 2021?

• Why is Apple expanding its board of directors?

• Regarding Apple’s removal of Parler from the App Store, don’t App Store review guidelines make it difficult for smaller companies to compete against the giants?

• What do you make of the rumors that Apple will remove the Touch Bar from new MacBook Pros?

• What do you make of IDC and Gartner projecting huge growth numbers for Mac over the holidays?

All of the following stories are accessible to members via the Daily Updates archive. Access to the archive is a benefit attached to membership. For new members, information about accessing the archive will be sent to you after going through the signup process.

The daily updates are also available via a private podcast called Above Avalon Daily. In January, 14 podcast episodes were recorded for a total of 200 minutes of audio. The daily podcast is available as an add-on that can be attached to an Above Avalon membership. More information on the podcast is available here. All prior episodes will appear in your podcast player after you sign up for the Above Avalon Daily podcast.