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A “Company Like Apple”: Revisiting Valuation Metrics

|Includes:Apple Inc. (AAPL)
I think a piece I wrote on Apple’s valuation  the other day, suggesting that the downside of the stock was about $290, was misunderstood. That’s my fault, of course, so let me clarify a few issues.
My $290 figure was based on my projection that when Apple releases its earnings next month, the balance sheet will show about $73 per share in cash, cash equivalents, and “marketable” securities (both long and short term).
It all started when a friend had asked me what I thought about Apple. The company has long been hoarding cash so I told him that if you have a chance to buy a cash-rich company like Apple at the current multiple of its  cash, it’s worth taking a look.
Note that I said “a company like Apple” – not any company. Would I value CSCO, ORCL, or IBM  that way? No. But my friend didn’t ask about those other companies, just Apple.
One problem with Apple is that the company isn’t exactly forthcoming with sharing its road map. I can evaluate IBM based on how it’s doing on its path to deliver on its clearly stated goal to generate $100 billion in free cash flow by 2016. That’s why it would be silly to simply use cash on the balance sheet as a valuation tool for IBM.
I was told that I should like Google at these levels if cash is the only metric I’m evaluating. I disagree. In my view, Google is not “a company like Apple” 
What are other companies “like Apple”? Quite frankly, I can’t think of many other company that with such a pervasive presence in so many sectors – music, tablets, phones – and so many channels including online music and retail. And I can’t think of many brands where people are willing to stand in line for hours to be among the first to pay more money for a device they could get somewhere else in 20 minutes.
I was also asked in a couple of comments, well what happens if Apple buys RIMM, HPQ or some other company and uses up all that cash?
What would I do? I would immediately stop using cash on the balance sheet as a metric for evaluating the company because it would become meaningless. And depending on the acquisition, I might even sell the stock.
But as long as the company maintains that cash balance, yes, I do see support for the stock near $290 which is roughly 4 times its cash balance.
One other thing worth noting. Apple is a growth company, and some thought it stupid to view cash on the balance sheet as a valuation tool if the company continues to grow or makes a smart acquisition. I agree. There’s no reason Apple couldn’t trade many many multiples higher than its cash balance if things continue to go well.
I was simply envisioning a worst-case scenario for the stock based on one metric that I happen to follow for this one company alone.
What is the “real” value of Apple?
Everyone will disagree as I pointed out in my post, “Zen And the Art of Apple’s Valuation.” One reason seems clear. People don’t even agree on how to value Apple, let alone determine the value itself.

Stocks: AAPL