Apple's Cash Hoard Is An Asset, Not A Liability

| About: Apple Inc. (AAPL)

The title of this article may seem to be a statement of the obvious. Cash and cash equivalents are accounted for as assets on a company's balance sheet. Yet a surprising number of investors appear to view Apple's (NASDAQ:AAPL) massive cash hoard as a negative for the stock. Recently, hedge fund manager Leon Cooperman of Omega Advisors jumped on this bandwagon. He told CNBC that several other stocks, such as Qualcomm (NASDAQ:QCOM) and Google (NASDAQ:GOOG) were now preferable to Apple, because of Apple's "financial policy". Cooperman's preference for Qualcomm over Apple seems particularly odd, as Qualcomm faces as much competitive pressure as Apple, or more, but trades at a higher valuation by most metrics. Like Apple, Qualcomm currently enjoys a dominant position in high-end smartphones, but is under threat from competitors: for Qualcomm, these include Intel (NASDAQ:INTC), Nvidia (NASDAQ:NVDA), and Samsung (OTC:SSNLF). Qualcomm's competitors are well-financed, and Intel and Samsung enjoy potentially massive economies of scale. Like Apple, Qualcomm may be able to maintain earnings growth if it innovates more rapidly than the competition, but it faces three credible competitors, where Apple faces just one. So what could justify picking Qualcomm over Apple?

Cooperman was apparently dismayed that Apple did not issue a special dividend last month, as many other cash-rich companies did. Cooperman's fund still holds some Apple stock, but has cut back on its position. However, Apple's failure to issue a special dividend hardly seems like a good reason to scale back positions in Apple at the same time that the stock price has fallen by more than 25%. Indeed, as of a year ago (when Cooperman was more bullish), Apple had not returned any cash to shareholders in over fifteen years! This March, the company announced a regular dividend and a modest $10 billion stock repurchase plan. Apple estimated that it would return $45 billion to shareholders over the course of three years. While this is less than the company will earn this year alone, it is hardly a pittance. With Apple finally showing some willingness to return cash to shareholders, and the company trading at its lowest P/E valuation in more than a decade (aside from a very brief period in the depths of the 2008-2009 recession), doubling down on Apple seems more appropriate than taking money off the table right now.

By contrast, Cooperman's decision to take money off the table implies that Apple's cash is a liability. Cooperman was bullish on Apple when the stock was trading between $600 and $650. If Apple had paid a $50 special dividend, Cooperman would presumably still like the stock at the adjusted price range of $550-$600. In that scenario, the company would have less cash on hand but trade at a higher price; the only way that valuation would make sense is if Apple's cash is a liability rather than an asset!

This valuation of Apple's cash as a liability is irrational, but it should not come as a total shock to investors. Last year, famed NYU finance professor Aswath Damodaran raised the possibility that Apple could be punished by investors for holding as much cash as it does. Due to investors' naivete, worries about management wasting the money on frivolous acquisitions, or the missed opportunity for enjoying the tax benefits of leverage, holding too much cash could damage Apple's stock price. While Damodaran believed last March that this was not yet happening, it is hard to deny that investors are now discounting Apple's cash. Apple's single-digit P/E excluding cash hardly seems warranted for a company that has shown strong earnings growth for many years, and is likely (at a minimum) to grow earnings at a low double digit or high single digit rate for the next few years.

I agree with those investors who want Apple to deploy its cash more aggressively. I think that Apple shares are so deeply undervalued at this time that it could even make sense to pay a higher tax rate in order to repatriate cash to the U.S. and execute a significant buyback (reducing the share count by more than 10%). In other words, Apple would be worth more if it were committed to returning all excess cash to shareholders. However, I see Apple's conservative cash policy as a missed opportunity rather than a black mark against the company. When Apple finally moves to return cash more aggressively, it should propel the stock higher, because the current "discount on cash" will evaporate. As a long-term investor, I am happy to wait for this share appreciation, insofar as Apple's long-term prospects seem very good compared to the stock's valuation.

It is ironic that investors are starting to discount Apple's cash at roughly the same time that the company has begun returning cash to shareholders. While Steve Jobs was in charge at Apple, it was plausible that money would continue to pile up on Apple's balance sheet as retained earnings. Jobs ruled the company with an iron fist, and didn't seem to have any interest in catering to shareholder wishes. Yet Jobs produced such incredible growth that there was no possibility of a real shareholder revolt. Today, with Tim Cook at the helm, there is little reason to believe that Apple will hold on to its cash indefinitely. In all likelihood, management and the Board are waiting to see if the U.S. government manages to pass some sort of corporate tax reform. It would be foolish for Apple to spend a significant amount on taxes in order to repatriate cash when it is possible that corporate tax rates will be lowered as part of the debt ceiling/sequester debate over the next few months. As a result, Apple's cash should just be seen as what it is: an asset.

Disclosure: I am long AAPL, NVDA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.