Apple Inc (nasd:AAPL) $91.21- Here's a quick snapshot of Apple's cash holdings over the past 9 quarters. In the case of Apple, it's extremely important to focus on cash flow opposed to accounting (GAAP) income due to the massive build of deferred revenue on its balance sheet. Total deferred revenue is $9.7B, $7.3B of which is iPhone related. Accounting EPS is often a poor gauge of a firm's actual earning power due to the many ways to legally (and illegally) inflate, obscure, or mislead actual performance. However, all one needs to do is follow the cash. The concept of investing is inserting cash into a vehicle that will return a larger cash amount back in the future. Cash flow, not earnings, best reflects a firm's investment prospects.
Apple's cash holdings swelled from $11.9B (Dec '06) to $28.1B (Dec '08), an increase of $16.2B. In terms of cash per share, Apple reported $31.20/share for Dec '08, and increase of $17.76 from the $13.44/share reported Dec '06. In the last 8 quarters, Y/Y cash growth has averaged north of 50% (per annum).
Just in the past 4 quarters, Apple's cash has ballooned $9.7B from $18.4B. Cash per share has increased more than $4 the past two periods, and last quarter (Dec 08), cash/share rose $10.71 from prior year quarter. What gives this cash holdings data meaning is the comparison to EPS. Apple's TTM EPS is $5.39, but TTM increase in cash/share is almost double, $10.71. Obviously, iPhone sales are responsible for the wide disparity.
Using price multiples as a valuation metric, Apple trades at 17x TTM EPS, but only 8.5x TTM cash/share. That's a massive difference, and many make the mistake of using PE ratios to compare Apple to its peers which is unreliable due to the EPS distortion caused by iPhone revenue referral.
Of course, the market is forward looking, as TTM ratios are less meaningful due to being historical-based metrics. However, the iPhone should continue to exhibit decent sales being a solid product in a growing market segment. This will cause the disparity between accounting EPS and cash flow to continue. Considering that Apple has historically traded at 40-50 TTM PE multiple, valuation is attractive on a long-term investment horizon. In my opinion, the short-term economic challenges are priced-in, but the long-term competitive advantage and earnings power is being ignored. That's the nature of the current mood of the market, and AAPL will probably go lower before it goes a whole lot higher. Eventually, when the economy shows signs of regaining its footing, and investors are comfortable owing stocks again, AAPL will go much, much higher. Downside risk is somewhat limited due to Apple's cash position and strong products that should at minimum, support valuations not terribly too much lower than the current share price.
Yet, risk still exists, and I would imagine shares stay range bound $75-$105. Apple's fundamentals provide strong support, but breaking through resistance above ~$105 and ~$115 will require sustained money flow from cash coming off the sidelines. Hence, participation by institutions and funds that have longer-term investment outlooks. Recently, Apple hasn't been able to sustain any sort of rally off positive news as traders have been quick to take profits, as well as selling/shorting into market weakness and rises of increased pessimism. If/when the equity investor were to return, Apple would be a popular choice at current levels.
