Apple's Downside Risk: $290 Just Based on Cash

Jun.20.11 | About: Apple Inc. (AAPL)

A friend who generally doesn’t manage his own investments, but occasionally buys stocks on his own, asked me what I thought of Apple.

As of Friday, Apple was trading below its 200-day moving average. Is it a good buy at that level?

Well, by definition a stock can’t trade above its 200-day moving average forever. Eventually the average catches up to the stock. Three months ago, Apple’s 200-day moving average was under 300. Now it’s more like 325, so you have to expect that the average itself will eventually get “too high.”

I did tell my friend that as of its last earnings release, the cash on Apple’s balance sheet totaled about $70 per share. Technically, that’s cash plus marketable long- and short-term securities, but most people view that as cash.

So I was wondering: What’s the downside for Apple? Based on cash, I figure $290.

Here’s how I get there.

I took a look at Apple’s cash position over the past few years. This chart shows the cash per share. The figure for July 2011 is my own estimate - just a guess really - that Apple will report 4% more cash on its balance sheet for the next quarter. That may be low, but I think it’s a conservative estimate.

I plotted these figures against how Apple has traded since late 2008 – essentially creating a chart that shows Apple’s “cash multiple” – or the ratio of the price over the cash per share. The levels for July are based on my own estimate (click to enlarge image):

Click to enlarge

Just to be clear, this isn’t is a cash flow estimate. It’s merely based on cash on the balance sheet. As you can see, Apple seems to max out at the 6x cash level, sometimes falling below the 5x cash level, but has not traded at the 4x cash level for a few years now.

Note that the cash levels I plotted are based on when it’s reported, not when it actually appears in Apple’s coffers. Apple will have a certain amount of cash on its balance sheet as of the end of June. We won’t know what that amount is until July.

So I figure Apple is a screaming buy at my projected 4x cash level or around $290 per share. If we have the equivalent of another financial crisis or panic, the 3x cash level is around $220.

Disclosure: I am long AAPL.