Let’s take a high level look at the numbers:
Shares outstanding – 939 million
Share Price - $450
Market Cap - $422 billion
Less Net Cash/Securities as of Last Quarter End Dec. 29, 2012 - $130 billion
Enterprise Value - $290 billion
Cash Flow for the Fiscal Year ending Sept. 29, 2012 - $50 billion
For a price of $290 billion (the enterprise value) investors are buying a company that last year generated $50 billion of cash flow. That is a free cash flow yield of 17%.
That is really tantalizing when you consider that this company has been growing that cash flow at a pretty high clip for quite some time.
I don’t own shares in Apple, but I’m much more interested at $450 per share than I was at $700 per share. But I still have serious reservations. Those reservations haven’t always been my friend though as they have cost me missing out on the ride in share price depicted in the chart below:
My reservations center around just how big the company has become and the incredible amount of money that it makes.
Last year, the company generated $50 billion in cash flow on a dizzying $156 billion of sales. Incredible numbers. They are so big they frighten me. At some point, won’t the public’s appetite for these products be exhausted? Won’t people wise up and realize that they shouldn’t take on credit card debt to buy the newest Apple device? Just how long can Apple be cutting edge? When does it end and if it does, how big is the haircut to sales and cash flow?
Additionally, why can’t a competitor hit a hot streak and make Apple not so cool? It seems ridiculous to think now, but thinking Apple would do what it has done would have seemed ridiculous 10 years ago. I feel it is impossible to know what might be developed by a competitor that could seriously damage Apple.
I guess what I’m basically saying is that if Apple was a major league baseball player, it would be on a streak where it has hit 50 home runs per year and batted .400 for the past decade. It has been incredible, but can it really keep playing at this level?
All good things must end.
This week I watched a video of Columbia University’s Value Investing Professor Bruce Greenwald discussed Apple. His observations which I’ve recapped below capture the concerns that I’ve always had in a more articulate manner:
- Apple today is clearly a “profit machine” and based on traditional valuation multiples it is not overvalued.
- The problem is that we know this “profit machine” is going to go away. It happened to Sony in this industry, it happened to Motorola in this industry, it happened to Nokia in this industry and it is going to happen to Apple in this industry.
- We just don’t know when it is going to happen to Apple.
I agree with Greenwald and that is why I’ve stayed away from Apple. However, at some price almost every company is a great investment opportunity. The hard part for me with Apple is to figure out what the price is. We may very well be at it today.