Apple's growing cash hoard
Two days before Apple's (AAPL) annual meeting — the first in more than a decade that Steve Jobs won't attend — Financial Alchemist's Turley Muller offers beleaguered shareholders a statistic that should provide some comfort:
Apple's cash holdings have grown at an annual rate of 50% (year-to-year) or more every quarter for the past two years. (link)
"Cash flow, not earnings, best reflects a firm's investment prospects," writes Muller in a post published Monday. This is especially true for Apple these days because the usual standard for evaluating a stock — earnings per share (EPS) — captures only a fraction of the revenue flooding in from iPhone sales.
As Apple's executive team has repeatedly pointed out to analysts, the company doesn't recognize the income from sales of the iPhone in the quarter in which it is collected. Instead, using so-called subscription accounting, it spreads it out over eight quarters — the life of a typical iPhone contract. (See Spotlight on Apple's hidden revenue stream.)
That revenue isn't lost, of course. It flows directly into Apple's coffers, which have swelled over the past two years from less than $12 billion to more than $28 billion.
See Muller's chart below (click to enlarge):
Because most analysts continue to track Apple's EPS without taking this hidden revenue stream into account, says Muller, they're missing the impact of a rising tide of cash.
Apple today trades at 17 times earnings per share, but only 8.5 times cash flow per share. "That's a massive difference," Muller writes. Apple shares have historically traded at 40 to 50 times earnings.
"In my opinion, the short-term economic challenges are priced-in," Muller concludes. "But [Apple's] long-term competitive advantage and earnings power is being ignored. … Eventually, when the economy shows signs of regaining its footing and investors are comfortable owning stocks again, AAPL will go much, much higher." (link)
Acquisitions are dirt cheap right now. I would like to see Apple buy a content distributor like Netflix ($2B) or shore up its software by buying Adobe ($9B).
I would love to see Apple buy a small cable system to experiment with new home-entertainment technology and then license the hell out it to Comcast and Time Warner.
@ Analysts-
Thanks! I completely agree. I think PE multiples are poor metrics, CF multiples are much better, which essentially captures netting out the cash to a degree. Especially since interest rates are so low, interest income doesn't have much effect on EPS, but it surely would if rates were higher since AAPL has so much cash investments.
Another powerful metric is EV/NOPAT. Enterprise value = market value – cash + debt, NOPAT is net operating profit after tax, (which excludes interest income) this is really the correct multiple if netting out cash.
Thanks for your input.
@ Analysts-
Thanks! I completely agree. I think PE multiples are poor metrics, CF multiples are much better, which essentially captures netting out the cash to a degree. Especially since interest rates are so low, interest income doesn't have much effect on EPS, but it surely would if rates were higher since AAPL has so much cash investments.
Another powerful metric is EV/NOPAT. Enterprise value = market value – cash + debt, NOPAT is net operating profit after tax, (which excludes interest income) this is really the correct multiple if netting out cash.
Thanks for your input.
Cash, smash: who cares. It doesn't help the shareholder much if they never get to enjoy any of it.
Sure it looks good on paper, and may bouy the stock during good times. And it is definately good for the EMPLOYEES!
But, if a time comes when Apple looses their charm, they will spend the cash while the stock goes down.
Just look at MS or BRKA right now.
Cash, smash: who cares. It doesn't help the shareholder much if they never get to enjoy any of it.
Sure it looks good on paper, and may bouy the stock during good times. And it is definately good for the EMPLOYEES!
But, if a time comes when Apple looses their charm, they will spend the cash while the stock goes down.
Just look at MS or BRKA right now.
Thank you Mark and Tyler!
I was under the impression that Apple spread the iPhone accounting over the length of a contract because Apple received a portion of each month's payments to AT&T. If this no longer applies to 3G – OK.
While I want to see SPJ make a full recovery, I am not concerned about his health as it relates to the company. I have held the stock for years and will continue to do so no matter what.
The bench is strong and deep; they have a level of corporate and strategic discipline and focus that is now legendary, though sometimes too rigid; their ability to read the market remains unparalleled; they remain laser focused on the customer, quality and innovation; and they have $28B in the bank.
There's no doubt I remain filled with confidence in Apple.
But I really want an iPod Touch Phone with a voice only plan!!! I am not income constrained, but I am frugal. Though I have bought top of the line Apple laptops every 2 years since 97, I will never buy an iPhone due to contract costs. I have had a $29/month, bargain basement voice-only cell phone plan for 9 years and will keep it along with the $30 phone that came with the plan.
There are more like me out there. Give us a good iPod Touch phone with voice only and free wifi, and for very little additional cost to Apple, the company gets one additional dumptruck load of cash ready to make a daily deposit at the Bank of Apple.
Thank you Mark and Tyler!
I was under the impression that Apple spread the iPhone accounting over the length of a contract because Apple received a portion of each month's payments to AT&T. If this no longer applies to 3G – OK.
While I want to see SPJ make a full recovery, I am not concerned about his health as it relates to the company. I have held the stock for years and will continue to do so no matter what.
The bench is strong and deep; they have a level of corporate and strategic discipline and focus that is now legendary, though sometimes too rigid; their ability to read the market remains unparalleled; they remain laser focused on the customer, quality and innovation; and they have $28B in the bank.
There's no doubt I remain filled with confidence in Apple.
But I really want an iPod Touch Phone with a voice only plan!!! I am not income constrained, but I am frugal. Though I have bought top of the line Apple laptops every 2 years since 97, I will never buy an iPhone due to contract costs. I have had a $29/month, bargain basement voice-only cell phone plan for 9 years and will keep it along with the $30 phone that came with the plan.
There are more like me out there. Give us a good iPod Touch phone with voice only and free wifi, and for very little additional cost to Apple, the company gets one additional dumptruck load of cash ready to make a daily deposit at the Bank of Apple.
@ Turley Muller, good point, and good article (your link).
The argument still applies that analysts are ignoring the $33 cash per share when looking at the P/E. This is a much larger error than the mistake of ignoring the interest earnings (in this environment!)
P/E (ttm):
Analysts: $87 / $5.36 = 16.2x
Correct: ($87-$33) / (5.25 – 0.70) = 11.6x
AND, with the deferred revenue from every single iPhone ever sold still hitting the books, it is very hard to imagine FY09 earnings falling below FY08! If the don't sell a single iPhone this quarter, iPhone GAAP revenue is still the same as Q408. Who thinks they didn't sell any handsets this quarter?
@ Turley Muller, good point, and good article (your link).
The argument still applies that analysts are ignoring the $33 cash per share when looking at the P/E. This is a much larger error than the mistake of ignoring the interest earnings (in this environment!)
P/E (ttm):
Analysts: $87 / $5.36 = 16.2x
Correct: ($87-$33) / (5.25 – 0.70) = 11.6x
AND, with the deferred revenue from every single iPhone ever sold still hitting the books, it is very hard to imagine FY09 earnings falling below FY08! If the don't sell a single iPhone this quarter, iPhone GAAP revenue is still the same as Q408. Who thinks they didn't sell any handsets this quarter?
@ Analysts are Innumerate,
You cant subtract cash from share price to calculate a PE multiple. That is fundamentally incorrect. The "E" or EPS includes interest income from the cash holdings so if you remove the cash from the share price, one must remove the interest income from the EPS which was about ~70-80 cents last year,
This explains the correct way to compare valuation multiples http://financial-alchemist.blogspot.com/2008/08/understanding-valuation-multiples-with.html
@ Analysts are Innumerate,
You cant subtract cash from share price to calculate a PE multiple. That is fundamentally incorrect. The "E" or EPS includes interest income from the cash holdings so if you remove the cash from the share price, one must remove the interest income from the EPS which was about ~70-80 cents last year,
This explains the correct way to compare valuation multiples http://financial-alchemist.blogspot.com/2008/08/understanding-valuation-multiples-with.html
Analysts say a cash hoard is nothing to be proud of and Apple stock gets beaten to hell the same as any company that doesn't have a cash hoard as big. One thing that's good about a cash hoard is that they can still continue to pay employees and run retail stores even if no customers come there to buy products.
Analysts continue to say Apple will get hit worse in this economy than any other computer maker even though they have four times the cash hoard of competing companies and that's why the stock continues to be hammered despite deferred iPhone revenue.
Apple supposedly has orders for 25,000 iPhones in Saudi Arabia in the past few days which seems fairly impressive. Did it make any difference in Apple's stock price? Yeah, negatively.
Bottom line: Cash hoard and stock price have no relation.
Analysts say a cash hoard is nothing to be proud of and Apple stock gets beaten to hell the same as any company that doesn't have a cash hoard as big. One thing that's good about a cash hoard is that they can still continue to pay employees and run retail stores even if no customers come there to buy products.
Analysts continue to say Apple will get hit worse in this economy than any other computer maker even though they have four times the cash hoard of competing companies and that's why the stock continues to be hammered despite deferred iPhone revenue.
Apple supposedly has orders for 25,000 iPhones in Saudi Arabia in the past few days which seems fairly impressive. Did it make any difference in Apple's stock price? Yeah, negatively.
Bottom line: Cash hoard and stock price have no relation.
with all that cash it would be nice of them to pay dividends. ahh well. it seems i mistimed the market again and returned my shares too quickly. who knew it would go even lower.
with all that cash it would be nice of them to pay dividends. ahh well. it seems i mistimed the market again and returned my shares too quickly. who knew it would go even lower.
@timothy: If iPhone owners cancel their cell contracts, it doesn't affect Apple, as the iPhones were already paid for by AT&T and the customer. The revenue-share of the original iPhone does not apply to iPhone 3g, and those original iPhone contracts are just about up.
As for AAPL stock, as long as Jobs' health hangs over Apple, you are at risk some major down days. If you can live with that, however, there is great value and potential stuck in there.
@timothy: If iPhone owners cancel their cell contracts, it doesn't affect Apple, as the iPhones were already paid for by AT&T and the customer. The revenue-share of the original iPhone does not apply to iPhone 3g, and those original iPhone contracts are just about up.
As for AAPL stock, as long as Jobs' health hangs over Apple, you are at risk some major down days. If you can live with that, however, there is great value and potential stuck in there.
you can't get a job without a phone….in this day and age, what are you more likely to keep, your landline at home or your cell phone that goes with you as you travel the country looking for jobs [or Steve Jobs 
]
plus, my iphone plan (voice plus data plus text) costs less per month than my landline at home and does a lot less.
…but you are correct…the facts are irrelevant in this market – a tidal wave sinks all boats
you can't get a job without a phone….in this day and age, what are you more likely to keep, your landline at home or your cell phone that goes with you as you travel the country looking for jobs [or Steve Jobs ]
plus, my iphone plan (voice plus data plus text) costs less per month than my landline at home and does a lot less.
…but you are correct…the facts are irrelevant in this market – a tidal wave sinks all boats
The math is way off here for cash and short-term equivalents per share. It is not 8.5 times per share. Instead it is 28,500,000,000 (cash and short-term equivalents) / 888,330,000 = 32.0867, which when divided into the current share price (86.95) gives 2.7 times cash per share! Wall St. is clearly clueless when it comes to Apple. Companies like Palm and Amazon have much much higher cash multiples, yet when it comes to Apple, the market acts as if it is back in 1997 with few prospects despite the FACT that Apple has a mountain of deferred revenue that will be adding to its earnings in 2009.
ex ped: Muller meant to say 8.5 times cash flow.
The math is way off here for cash and short-term equivalents per share. It is not 8.5 times per share. Instead it is 28,500,000,000 (cash and short-term equivalents) / 888,330,000 = 32.0867, which when divided into the current share price (86.95) gives 2.7 times cash per share! Wall St. is clearly clueless when it comes to Apple. Companies like Palm and Amazon have much much higher cash multiples, yet when it comes to Apple, the market acts as if it is back in 1997 with few prospects despite the FACT that Apple has a mountain of deferred revenue that will be adding to its earnings in 2009.
ex ped: Muller meant to say 8.5 times cash flow.
Does anyone know how much of that cash is spoken for with all of Apple's large, long term contracts for RAM, LCD screens, etc.?Such contracts are good for Apple, but they can't go spending it on something else.
Does anyone know how much of that cash is spoken for with all of Apple's large, long term contracts for RAM, LCD screens, etc.?Such contracts are good for Apple, but they can't go spending it on something else.
Even Muller made the same mistake analysts make: NET OUT THE CASH ON HAND, PEOPLE!!
First, it's not "8.5 times cash per share" as this author has mistakenly reported, it's "8.5 times cash flow". Cash per share was $31.20 on 12/31/08, and well north of $32.50 today. Closed today at $87.10. Back out $32.50 to arrive at $54.60. That's what you are paying, today, for AAPL's cash flow and earnings, per share. Want to compare the P/E to other companies, $54.60 divided by EPS est, and get about 10x. 10x earnings for a debt-free growing company is massively cheap. $54.60 is even cheaper when you look at the cash flow it is buying.
ex ped: Thanks!
Even Muller made the same mistake analysts make: NET OUT THE CASH ON HAND, PEOPLE!!
First, it's not "8.5 times cash per share" as this author has mistakenly reported, it's "8.5 times cash flow". Cash per share was $31.20 on 12/31/08, and well north of $32.50 today. Closed today at $87.10. Back out $32.50 to arrive at $54.60. That's what you are paying, today, for AAPL's cash flow and earnings, per share. Want to compare the P/E to other companies, $54.60 divided by EPS est, and get about 10x. 10x earnings for a debt-free growing company is massively cheap. $54.60 is even cheaper when you look at the cash flow it is buying.
ex ped: Thanks!
I agree with the conclusion. But there is a small issue that keeps getting lost. The most expensive thing about an iPhone is the contract. What percentage of iPhone owners have lost jobs in the last 13 months, and are still unemployed? Extrapolate the impact of this and the eventual decision to cancel their AT&T contracts in order to save money. Very soon, I think you may begin to see a slow down in the rate at which iPhone cash flows build.
Said differently — if the recession deepens and goes into 2010, these iPhone cash flows will dry up as people terminate contracts to save money.
This is why I think that Apple would be wise to create plans for the iPhone which offer:
-Voice only (iPod Touch phone);
-Data only (iPod touch Newton);
-Data and Voice (iPhone).
Those who are more income sensitive right now, and who can not consider the iPhone 3G due to cost, would flock to the less expensive iPod Touch Phones with voice only. Some might select the Data only device.
Those who are less income sensitive would continue to purchase the iPhone 3G.
This caters to various income groups by broadening product choices up and down the price ladder. Yet it does not get Apple into the so-called Cheap Goods Arena that they refuse to operate in. This is no different than their proven and successful iPod stratification plan.
I agree with the conclusion. But there is a small issue that keeps getting lost. The most expensive thing about an iPhone is the contract. What percentage of iPhone owners have lost jobs in the last 13 months, and are still unemployed? Extrapolate the impact of this and the eventual decision to cancel their AT&T contracts in order to save money. Very soon, I think you may begin to see a slow down in the rate at which iPhone cash flows build.
Said differently — if the recession deepens and goes into 2010, these iPhone cash flows will dry up as people terminate contracts to save money.
This is why I think that Apple would be wise to create plans for the iPhone which offer:
-Voice only (iPod Touch phone);
-Data only (iPod touch Newton);
-Data and Voice (iPhone).
Those who are more income sensitive right now, and who can not consider the iPhone 3G due to cost, would flock to the less expensive iPod Touch Phones with voice only. Some might select the Data only device.
Those who are less income sensitive would continue to purchase the iPhone 3G.
This caters to various income groups by broadening product choices up and down the price ladder. Yet it does not get Apple into the so-called Cheap Goods Arena that they refuse to operate in. This is no different than their proven and successful iPod stratification plan.
Acquisitions are dirt cheap right now. I would like to see Apple buy a content distributor like Netflix ($2B) or shore up its software by buying Adobe ($9B).
I would love to see Apple buy a small cable system to experiment with new home-entertainment technology and then license the hell out it to Comcast and Time Warner.