Apple Is Due For A Substantial Correction

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

I am fine with Apple's (NASDAQ: AAPL) cash position and find David Einhorn's lawsuit as well as his plan for "iPreferreds" as gimmicky. I do not believe that the adoption of any such plan would "unlock" value anymore than a 10 for 1 stock split. The announcement of such schemes would create a short-term bounce from the same type of investor who would get excited if you offered to give them ten $1 dollar bills for a single $10 bill.

The informed investors can account for the cash and speaking for myself, I am content with Apple investing the cash. If I wanted the cash so badly I would buy a bond or a utility.

Even from the rational perspective of a private market investor, Apple is due for a correction - and that correction should easily put it at a minimum P/E of 16-17 times earnings based upon the long-term average P/E multiple of the DJII (with earnings around $750 per share).

In all the media story telling and fear mongering, we forget the objective is to eventually make a boat-load of money. The reason we pay the premium is on rising hopes.  Reflected in recent Google euphoria with a P/E of 24 - is the hope that someday - Google may find themselves with $137 billion in cash along with cash-flow that is almost annuity-like when you consider the quarterly billions generated from itunes alone thanks to music, videos and apps.

I love Google as a business and believe they will continue to grow substantially, so I'm not knocking them when I philosophically assert that the situation Apple is now in is the ultimate -end goal- of what Google aspires to achieve. The market assigns them that 24 P/E in hopes that they ultimately arrive at Apple's current state of being.

When you buy Apple for $400 billion and a quarter of the assets are in cash with no debt, how long does it take to get all of the $400 billion the investor now pays - replaced back into the company treasury - in cash? Not long based upon the way Apple generates it with $40 billion in annual free cash flow.

If you divide the cash of $137 billion by the 939,060,000 shares outstanding you have approximately $146 per share in cash. If you subtract that from Apple's stock price of approximately $447 per share you are left with Apple as a company trading at a P/E multiple of 6.76. That's 6.76 times Apple's trailing 12 month's earnings and if the forward P/E for fiscal year 2014 is correct, it gets even lower. I subtract the cash & equivalents because again, philosophically, the share price minus the cash is what one can say the buyer is actually paying for the enterprise.  

If this isn't the floor for Apple, soon, as the cash continues to pile up, a future Apple investor will get the "enterprise for nothing or their cash for free" (if I may borrow from Dire Straits).


Scott Ryan Anderson is Long Apple.  The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure