An Intermediate Term Money Market Fund That Includes a Computer Giant Bonus
Scott is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As I look at the news headlines dramatizing the death of Apple (NASDAQ: AAPL), I have to ask myself whether short sellers are piling on? Even if Apple's customer base were to altogether cease growing or even decline somewhat, we know that Apple is a company that has a history of maintaining loyal customers. If we look back to the early to mid 1990s before Steve Jobs was brought back as CEO, Mac users were essentially Mac users for life. To a large number of them, Apple was practically a religion as much as a personal computer pioneer. That hasn't changed.
What has changed is that almost a decade later, they have around 100 million iPhone users, many of whom have been loyal customers who purchased the products from the inventor of the smartphone "genre." Not only that, they loyally purchase apps, music and videos through Apple's itunes store. So even though these customers upgrade to newer versions of the iPhone at varying time frames, these sales create what has been like a $2 billion annuity to Apple.
Apple is currently priced for the apocalypse so those entering at these ludicrous levels should be rewarded if Apple simply maintains. As cash continues to build, it becomes an arbitrage. As I wrote in my previous blog, if, for the purpose of calculating the real current P/E by subtracting the "cash & marketable securities" from the current share price (looking at cash for cash a wash), Apple is essentially selling for approximately 6 times trailing 12 months earnings and that cash will continue to pile up.
These shares are getting closer to representing a global cash ETF that gives one the enterprise of Apple as a bonus. Markets may be efficient in the long term but this irrational valuation represents the piling on by short sellers. If it gets any cheaper, they could become the target for a hostile, albeit ultra-leveraged takeover as the buyer can use the cash and marketable securities to pay for the acquisition.
I'm no clairvoyant but one doesn't have to be in order to see how this ends (but not for Apple). The way this headline driven, nonsensical scenario ends is going to be similar to another recent debacle (for some). Shorts are going to be in a -world of heart- reminiscent of the now legendary Netflix short squeeze. And when this happens, there’s going to be weeping and gnashing of teeth.
The difference is that Netflix beat the street expectations, thereby causing investors to see their game plan in a different light. With Apple, they do not have to beat the street expectations as there is no way to make sense out of the current market valuation. Investors only need to wake up to the fact that Apple is extremely healthy, they're not going away and is close to an arbitrage in valuation. They are priced as a company, the epithet of which is already written. Their wild fantasies are not going to be realized. The Apple shorts are running on fumes supported only by the "greater fool theory" usually reserved for over zealous bulls. To sell Apple at this level, one must be among the greatest of fools.
As I look at all of the negative bloggers pile on the same prosaic rhetoric day after day, I am reminded of the story "The Emperor has no Clothes." In the case of stock bubbles, they come to an abrupt and painful end at the moment that the crowd realizes that the emperor is actually naked. Apple represents this fable in reverse. We see this exquisite suit, i.e. a pristine balance sheet, profits, margins, cash flow, great products with high margins and loyal customers. The crowd denies that there is an emperor but no matter how bellicose and disdainful the rants of this crowd become - they do not speak for Apple's customers. So no matter how much they talk, the cash will continue to mount. The reality is that the clothes have a magnificent Emperor. The emperor in this analogy is not CEO Tim Cook but rather the company itself. I have publicly written about the importance of visionary leadership at Apple. It may or may not be Tim Cook - but this is a column about absolutely insane valuations.
Thurston3 has no position in any stocks mentioned. 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!