Seems like the point of the article is sound, though did anyone else find it muddled in the middle? Seemed like there was some circular or backwards reasoning, like that Apple's potential future growth makes its past growth likely to continue, or that Apple's cash increases the stock's value even if you ignore its cash.
My own take on investing in "growth" stocks is generally that I'm not going to bank on already-hyped companies being under-hyped, like betting that while everyone thinks Google will grow X big amount forever, it's actually even bigger amount Y! Not very contrarian. However, it's possible the market doesn't quite realize just how successful Apple is being right now.
I agree about some of the reasoning in the article not being really clear (I think it is more writing than substance, though). I think the key to smart phone growth is that the feature phones are still the majority and will get eaten by the new thing. I can't help thinking we are in the 70's with the calculator vs PCs.
"...that Apple's cash increases the stock's value even if you ignore its cash."
For companies with large pools of cash, it's sometimes useful to remove that from the market cap when looking at how they're valued by the market (similarly, you'd add in debt to get the enterprise value.) Ostensibly the market values a dollar in the bank as a dollar of market cap (although one can argue that.) So if you're trying to see if the market is undervaluing the actual enterprise as a whole relative to its earnings flow, you want to subtract the cash holdings from the market cap.
Maybe easier as an example: If you have a company with $1 earnings, $100 market cap and $99 in the bank, it might look like the market is valuing it at 100x earnings unless you subtract that $99 and see that the market is valuing the enterprise at 1x earnings.
> Seemed like there was some circular or backwards reasoning, like that Apple's potential future growth makes its past growth likely to continue, or that Apple's cash increases the stock's value even if you ignore its cash.
Apple's cash position projects power.
This is what fundie investors who subtract cash aren't factoring in. The ability to make strategic buying purchases which constrain supply for competitors is not easily calculated.
Now think about the "ability to make such deals" with valuations 10x that... Can Dell, HTC or RIM do this? If not, then they are at a disadvantage, as Apple could massively out-bid them on volume with key suppliers.
I looked all over the page and didn't see the "full disclosure" notice that should be there regarding the author's ownership (or lack of ownership) of AAPL stock. We get that the "contributor" is touting himself as an analyst, but even in that case, it's still just opinion.
[edit]: Unless this is it? (From the very end of the article)
Given the recent rare opportunity to buy Apple at an extremely cheap valuation, I've been betting on some 2011 Apple leaps over the past few weeks and plan to remain long Apple for an extended period of time.
-----
There's significant risk (the potential permanent departure of an iconoclastic chief executive) that is being incorporated into their stock price.
Also, analysis of the cash per share at a large technology company should generally be viewed differently than it might be at a manufacturing company or somewhere else. Tech companies are subject to violent earnings fluctuations based on changes in consumer demand. Cash stockpiles are a hedge against that eventuality in addition to an asset.
One theory I've seen for tech firms building up vast cash stockpiles is that for many shareholders, dividends are not what they want. They want share price growth, because of the relative tax treatments of dividend income and capital gains.
Of course this will vary from country to country etc.
13 comments
[ 3.8 ms ] story [ 43.4 ms ] threadSeems like the point of the article is sound, though did anyone else find it muddled in the middle? Seemed like there was some circular or backwards reasoning, like that Apple's potential future growth makes its past growth likely to continue, or that Apple's cash increases the stock's value even if you ignore its cash.
My own take on investing in "growth" stocks is generally that I'm not going to bank on already-hyped companies being under-hyped, like betting that while everyone thinks Google will grow X big amount forever, it's actually even bigger amount Y! Not very contrarian. However, it's possible the market doesn't quite realize just how successful Apple is being right now.
For companies with large pools of cash, it's sometimes useful to remove that from the market cap when looking at how they're valued by the market (similarly, you'd add in debt to get the enterprise value.) Ostensibly the market values a dollar in the bank as a dollar of market cap (although one can argue that.) So if you're trying to see if the market is undervaluing the actual enterprise as a whole relative to its earnings flow, you want to subtract the cash holdings from the market cap.
Maybe easier as an example: If you have a company with $1 earnings, $100 market cap and $99 in the bank, it might look like the market is valuing it at 100x earnings unless you subtract that $99 and see that the market is valuing the enterprise at 1x earnings.
Apple's cash position projects power.
This is what fundie investors who subtract cash aren't factoring in. The ability to make strategic buying purchases which constrain supply for competitors is not easily calculated.
Here is their latest (publicly known) deal with Samsung: http://online.wsj.com/article/BT-CO-20110213-704284.html
Now think about the "ability to make such deals" with valuations 10x that... Can Dell, HTC or RIM do this? If not, then they are at a disadvantage, as Apple could massively out-bid them on volume with key suppliers.
I looked all over the page and didn't see the "full disclosure" notice that should be there regarding the author's ownership (or lack of ownership) of AAPL stock. We get that the "contributor" is touting himself as an analyst, but even in that case, it's still just opinion.
[edit]: Unless this is it? (From the very end of the article)
Given the recent rare opportunity to buy Apple at an extremely cheap valuation, I've been betting on some 2011 Apple leaps over the past few weeks and plan to remain long Apple for an extended period of time. -----
He should tell us that first.
He generally does not hold AAPL or any stock he comments on however. See his seekingalpha bio page.
Fortune really should provides a mandatory disclosure though.
Also, analysis of the cash per share at a large technology company should generally be viewed differently than it might be at a manufacturing company or somewhere else. Tech companies are subject to violent earnings fluctuations based on changes in consumer demand. Cash stockpiles are a hedge against that eventuality in addition to an asset.
Of course this will vary from country to country etc.