On Apple, Cash and Why the Stock is Undervalued

Apple recently released quarterly earnings numbers that were Mickey Mouse in scope. EPS beat consensus analyst estimates by 50%. Apple sold every iPad they could manufacture. 1/2 of Mac sales were to consumers that had never owned a Mac before. The iTunes store continued to flourish. A sparkling new store in Grand Central Station just opened. Apple now has 76 billion in cash. Accordingly, the stock popped up to above $380 (the sketchy run-up in price prior to earnings suggests insider knowledge to me, but that's another story). The stock was all the way down to $315 in mid to late June and had been underperforming the market as a whole. It seemed that analysts didn't trust their valuations, Apple's crazy growth numbers or Apple's ability to stave off myriad competitors. Presently, the stock sits at $404 and a P/E ratio of 15. But we'll come back to the stock in a bit. Cash. 76 billion. Apple has more in cash than the entire market cap of Goldman Sachs. What will it do with all that cash? For one, Apple has and will continue to throw around its weight with suppliers. The sheer size of Apple's orders allows it to dictate terms to suppliers, including locking in supply and locking out supply for competitors. The cash also allows Apple to get iPads to market when the unforseen demand predicated it. Apple has also been extremely proactive in the legal and patent world, paying huge money for Nortel patents and expending resources to stave off lawsuit plays. We haven't seen much in the way of large acquisitions, although the Hulu rumors are definitely fodder for conversation. I see Apple continuing to be aggressive with its suppliers and defending patents. But overall, the cash cushion gives Apple operational freedom, phenomenal Research and Development latitude and a general Ace up the sleeve. Back to the stock. Growth numbers of this scale are hard to accept as reality and even more difficult to trust when extrapolating forward. And of course Steve Jobs' health is an issue. But I see a company that has rolled out product after product that was best-in-class, obsesses over details, fully understands the value and impact of the customer experience and has shown an uncanny ability at getting consumers to spend income in the gray area between disposable and non-disposable, on products that exhibit high profit margins. Throw in other components on the periphery like the cash balance, impending Chinese mobile deal and possible Hulu acquisition, and I see no reason the growth cannot continue. Bold Prediction: AAPL will be trading at least at $550 on August 1, 2012. Buy, buy, buy! (Full disclosure, I own some).