Here’s a thought experiment: Let’s say that when Apple (NASDAQ:AAPL) releases its earnings next quarter, it totally blows away expectations on pretty much every metric. Even better, the company issues even higher guidance for future quarters than what “the Street” expects. This would be unusual as Apple, like many companies, prefers to underpromise and overdeliver.
The only hitch? Apple did not add any cash to the balance sheet. Or worse, that cash and marketable securities goes down by, say, $5 per share.
Would the stock go up or down? Or more specifically, do analysts, investors and traders really care about all that cash?
The funds are big enough to place Apple’s CFO office among the top 100 largest fund managers in the world and larger than any hedge fund manager.
Apple’s cash is worth half of Google’s (NASDAQ:GOOG) enterprise value.
About two years ago, in January 2009 the stock traded at a price of $78, with at least one analyst placing a target of $70 on the stock. Today Apple’s cash is worth $67/share.
If you owned $100,000 of Apple stock, $19,000 of that would be cash and only about $80,000 would be “at risk” capital.
If Apple had no revenues, the current cash would sustain operations (SG&A and R&D) for over seven years, or until the middle of 2018.
According to Greenberg:
Based on the total cash, some analysts believe Apple is woefully undervalued. But others believe that the valuation argument, at this point in the company’s cycle, is futile and somewhat meaningless. All that matters is that sales and earnings keep going higher.
Longtime Apple bull Gene Munster of Piper Jaffray recently told clients in a note:
We believe investors have grown tired of the valuation argument, given the monster numbers Apple reports only creates a higher bar for the out year growth rates. Even if the multiple remains depressed, we expect shares of AAPL to move higher, driven by earnings growth.
He added in a note to me:
The reason why most analysts don’t factor the cash into Apple’s valuation is the company has not done anything with the cash, and the theme I keep hearing is ‘don’t give them credit for the cash because we will never see it’.
So if analysts don’t give them “credit for the cash,” will they “debit” Apple if the cash balances fall? But more importantly, what do shareholders expect Apple to do with that cash?
Acquisition Anxiety: Risks of a large deal
As a shareholder, I kind of like the idea that the cash is there, but I do see the argument that that the cash is somewhat theoretical.
Here’s a way to look at it. Let’s say you own one of those ships in a bottle – and it happens to be worth $500 as a work of art. But let’s say you also know that there’s a $100 bill in the cargo hold of that ship. The $100 in cash? That should make the ship in the bottle worth $600, but you’d have to break the bottle and the ship to get that $100 bill. I think that’s how some people feel about the cash locked up in Apple’s shares.
The key, of course, is what Apple does with all that money. It does give the company a lot of freedom. If Apple wants some technology developed by some small company, it can just buy the company instead of developing similar technology on its own. A billion here and billion there won’t make much of a difference.
But I do worry about Apple making a large acquisition – I don’t know, maybe Adobe (NASDAQ:ADBE) for $20 billion or so. Even if an acquisition like that seemed to make sense, these huge deals often end up not being nearly as successful and profitable as originally envisioned. For example like the AOL (NYSE:AOL) and Time Warner (TWC) merger.
But back to my original question: Is the cash and marketable securities on the balance sheet really important to investors?
It would be hard to come up with a scenario where Apple doesn’t put more cash on its balance sheet next quarter. But would anyone care if the company didn’t? And does it make any difference what Apple does with that cash? I’m not sure. While I am not worried about Apple overall, I am concerned that a large purchase could end up reducing shareholder value. So that’s why I have Apple Acquisition Anxiety, but just a mild case. Hey, I have to worry about something.
Disclosure: I am long AAPL.