Snapshot: Apple's Cash Growth

Apple Inc (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.

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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.

Disclosure: Long AAPL

Comments

[deflation r...:]

Turley, great point. Unfortunately, I have probably lost more money due to this very reason. I would have sold my Apple at the 120-140 mark but thought that due to this large position of cash it would be able to continue to advance its products when others were unable to spend R&D dollars. Am I still making the same mistake? (Long AAPL)

Feb 23 06:50 AM

[Techtrader10:]

Accumulated cash is two things, first none working capital, second a dwindling asset in bad economic times. The most important points your not making are: 1. Steve Jobs is for all practical purposes gone, as even if he comes back, he will not have the same drive or energy. 2. Apple built the cash position during a time when the economy was also flush with cash, that is certainly not true now. 3. The foreign markets have also been saturated, not to mention economically devastated. 4. High priced toys don't sell well in recovering economies.

Feb 23 09:11 AM

[Grumann:]

Excellent article. Cash is king in a bad economy. I agree with the long term story and will add to my position on pullbacks. Major risk is iphone sales. Apple has to stay ahead of the curve and maintain a competitive advantage. My 16 year old was in Verizon yesterday and showed me some "cool" touch screen phones that his friends have. A deal with China is important too. Come on Apple, "get er done".

Feb 23 09:22 AM

[Uncle Miltie:]

On Feb 23 09:11 AM Techtrader10 wrote:

> Accumulated cash is two things, first none working capital, second
> a dwindling asset in bad economic times.

Actually, your points are both absolutely incorrect. Accumulated cash is absolutely working capital. And based on the amount of Apple's cash position, it's a moot point as they have far more cash on hand than is required to fund continuing operations.

Second, cash on hand in bad economic times - say a collapse in the market - is even more valuable than fixed assets. Apple sits in the envious position of being able to invest in any new technology that they choose. The can gain assets at fire sale prices, and their cash has already allowed them to negotiate sweet deals with suppliers who might not be weathering the econmoic downturn as well as Apple has.

As for your other points, Apple's recent results refute them all. "Best Quarter Ever" in the Christmas '08 quarter. E'nuff said.

Feb 23 09:30 AM

[Save Money ...:]

'$31.20/share for Dec '08'
So we're back under 90 again today? HOW can this not be a screaming deal, if you're thinking long term? IF we hit 80 again I'm leggin' in with some LEAPs..... one man's opinion...

Feb 23 10:11 AM

[mollytjm:]

because of the cash, Apple does have $$$ to put into R & D and i'm betting that they have some killer products in the pipeline. they are the best innovators on the planet and they aren't going to lose market share to wannabes.
the stock at this price is a steal. the company will obviously survive however long this economic mess lasts and there are always people with $ to spend, but also, people go one of two ways in a tight economy...cheap or quality. Apple certainly has the quality and it does have competitive pricing on some products, plus it offers refurbished and student discounts on others. Apple has top rated customer satisfaction. And...there's no way foreign markets are 'saturated'...especial... in Asia!
Thank you for a good article!

Feb 23 12:24 PM

[optionsgirl:]

Apple can fall to $50+ per share based upon current economic conditions, and not because of company fundamentals. Check the five year chart for aapl against the Nasdaq chart. You will see it is now in lock step, something that hadn't happened in years. While the economy tanks, apple will fall, because there are still plenty of institutional investors willing to sell the rallies and buy the dips, driving the prices in both directions. It's fundamentally strong cash position will not save it from the gyrations of the Nasdaq. This is a market driven by technicals (i.e. emotion) and not fundamentals. As for the comments that Jobs is essentially out permanently, that's probably true, but already factored into the sentiment and price.

Feb 23 12:52 PM

[Channon:]

Optionsgirl -- $50/share?? Hardly; they had $32/share CASH on the books on 12/31, and have been printing dollar bills non-stop for the 8 weeks since. Surely you think the enterprise is worth more than $18?

I hope you're right; I'll sell everything and go all AAPL!

Feb 24 02:01 AM

[Roger Knights:]

Apple would be better off, in the long run, if it had accumulated less cash and instead acquired a larger Mac market share by pricing its Macs lower, before the recession hit and Microsoft reduced the window of opportunity for rapid market-share growth of the Mac with its improved Windows 7. Those millions of additional Mac owners would stay in the Mac camp (few switchers go back) and be buyers of Apple's future Mac upgrades, boosting long-run profits.

In the short run, it looks good to have high margins and a "manageable" growth rate. But in the long run it's better--especially for a company with a somewhat precarious niche--to build a foundation for greater growth in the future. That's what Jeff Bezos had the vision and courage to do at Amazon, in the face of intense criticism, as described in the recent SeekingAlpha article, "Amazon's Wheel of Growth." Now it's paying off. Here's the link to the article:
seekingalpha.com/artic...

Feb 25 09:37 AM

[Roger Knights:]

Techtrader10 wrote:
"4. High priced toys don't sell well in recovering economies."

But weren't the Thirties a great time for sales of radios, victrolas, and movie tickets?

It's Windows that is "high-priced"--over the long run. And personal computers are not "toys." Those who are foolish enough to think so, or who do not rely on their computers for more than toy-like tasks, deserve a "cheap" operating system.

Feb 25 09:46 AM

[Roger Knights:]

TechTrader10 wrote:
"3. The foreign markets have also been saturated, not to mention economically devastated."

It's not as though foreign PC sales have gone down 100%, or 50%, or even 25%. The decline is well under 20%. And Apple has lots of room to grow Mac sales there, because it's market share is much lower than it is in the US. Indeed, exactly because the Mac is such a minor factor in the second and third world, Apple is in a position to turn over a new leaf and license its OS X to low-cost box makers there, which would instantly grab a large market share and profits at little expense. Its OS is where its real value lies. (Fortunately for Microsoft, this—so far—is heresy at Apple.)

As for iPhone sales, they’re still in first gear. Long-term, Apple could sell astronomical numbers abroad. None of the other touch-screen smartphones can touch it, except maybe the Pre. And by the time it’s rolled out, it’ll face the third-generation iPhone.

Feb 25 09:59 AM