$430 Billion Is Ridiculously Cheap For Apple

Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The title might look absurd to some people, and it may make others wonder. I can already imagine a lot of people saying "well, of course if I had $430 billion, I would buy Apple (NASDAQ: AAPL) within a heartbeat" whereas you will have the same people say "Apple is not cheap enough when it's $460 per share." Funny thing, many people don't realize that when we buy stocks of companies, we are actually buying pieces of that company. Buying Apple at $460 per share is like saying "If I had $430 billion, I would buy the entire company" because that's how it should be.

I always bring up Warren Buffett's philosophy, and my readers will remember how I did it with Ford last summer when Ford was trading for $9 per share. When people look at nominal share prices, they miss the whole picture because share price should reflect a company's market value divided by the amount of shares outstanding there are for that company. Warren Buffett basically says that when we are buying shares of a company, we should act as if we are buying the whole company for its market price. If it makes sense to buy the company at its market price, then it makes sense to buy its shares. If not, then we should stay away from its shares.

On Wednesday night in the after hours, many people sold their Apple shares to buy Netflix because they were concerned with Apple's "troubles" whereas they thought Netflix posted "impressive" results. Last time I checked, Apple was the second most cash generating institution in the USA with the exception of the Federal Reserve.

So, let's go back to the argument of Warren Buffett, who reportedly doesn't own any Apple shares. If I had $430 billion in my pocket, would I buy Apple? First, Apple has cash and cash equivalents of 137.1 billion. So the real price tag of Apple would have been $292 billion for a buyer. Now we are talking about a company with zero debt and this company generated $22 billion in cash just in the last quarter (the company spent about $4.5 billion on dividends and stock buybacks which wouldn't exist if someone were to buy Apple entirely). Apple is expected to generate more than $50 billion in cash in 2013. Anyone in their right mind with $430 billion would buy Apple within seconds, which makes it a great buy at its current price.

Companies like Netflix and Amazon don't even compare to Apple. Would you buy Amazon if you had $124 billion in your pocket, knowing that not only it didn't generate a single dime in cash flow, but it lost $4 billion in cash last year. That would be insanity wouldn't it? How about buying Netflix at $8 billion, knowing that the company will usually generate only a few hundred million dollars at best every year?

Just because investors don't appreciate Apple doesn't mean it's not a strong buy. Most people who bought Apple 10 years ago and held onto their shares are either ready to retire or very close to retirement now. The company still has a lot of growth left; however, it would be undervalued even with it didn't post any growth for the next 5 years, because the company generates a lot of cash compared to its share price.

Those who own a business know the importance of cash flow. In many cases cash flow is a much better metric than "income" which is subject to a lot of accounting gimmicks. Owners of companies would rather see realized cash than unrealized earnings. In order to see Apple's true value, one has to ignore the nominal share price and look at the company's market value and compare it with other metrics such as current cash, debt and cash flow. Most investors are foreign to this approach; that's why they end up buying companies like Amazon and Netflix when they could be buying companies like Apple.

Most of investing is common sense, and fundamentals always end up taking the driver's seat sooner or later. Currently, Apple doesn't trade on fundamentals. The company trades on fear, concerns and "lack of hype." At the end of the day, those who invest on hype usually lose money and those who invest on fundamentals usually earn money.

The funny thing is, the last time Apple went down to the low $500s, everybody was singing "doom and gloom" just like now. Then Apple's share price moved up to low $700 and everybody started to sing "praise and glory." Now everyone is back to "doom and gloom." Psychologically, it is so easy to bash something when it's going down and it is so difficult to defend something going down. Similarly, it is easy to praise something moving up and difficult to criticize it. As humans, we love to ride and follow trends. As soon as Apple starts moving up again, the people who are now talking about how the "game is over for Apple" will be the first ones to start screaming "buy, buy, buy!"

And let's talk about Apple's recent "troubles" for a little bit. Whenever people talk about Apple's "troubles" it always makes me wonder. Usually when people say Apple is in "trouble" what they mean is that they don't think the company's revenue will double in the next year. They think that Apple is obligated to double its revenue every year, and if it doesn't happen, the company must be in deep trouble. In that sense, we can say that 95% of the companies in S&P 500 index are in deep trouble. Most companies in S&P 500 will not post a growth rate anywhere near Apple's growth rate anytime soon.

Another thing people always say to be troublesome for Apple is its "contracting margins." Apple's margins usually go between 35% and 40% and this is pretty impressive for a company that generates most of its revenues from hardware sales. When Amazon's gross margins are around 25%, no one seems troubled, but when Apple's gross margin hits 37%, everyone thinks the company's days are over. If only Netflix could get Apple's margins. When the expectations are unrealistically high for Apple, it hurts the company's share price.

I agree that Apple's growth rate and margins might decline over time, but they still remain above most if not all Apple's peers. The company's fundamentals are very strong and this makes Apple a very cheap company. In fact, recently I bought a bunch of Apple shares to increase their weight in my portfolio. I definitely don't agree with those that talk as if Apple is going out of business. The company just reported record revenues and profits, we should give it a break.


JacobSteinberg owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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