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Apple’s growing cash hoard

By
Philip Elmer-DeWitt
Philip Elmer-DeWitt
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By
Philip Elmer-DeWitt
Philip Elmer-DeWitt
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February 23, 2009, 2:31 PM ET
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Two days before Apple’s (AAPL) annual meeting — the first in more than a decade that Steve Jobs won’t attend — Financial Alchemist‘s Turley Muller offers beleaguered shareholders a statistic that should provide some comfort:

Apple’s cash holdings have grown at an annual rate of 50% (year-to-year) or more every quarter for the past two years. (link)

“Cash flow, not earnings, best reflects a firm’s investment prospects,” writes Muller in a post published Monday. This is especially true for Apple these days because the usual standard for evaluating a stock — earnings per share (EPS) — captures only a fraction of the revenue flooding in from iPhone sales.

As Apple’s executive team has repeatedly pointed out to analysts, the company doesn’t recognize the income from sales of the iPhone in the quarter in which it is collected. Instead, using so-called subscription accounting, it spreads it out over eight quarters — the life of a typical iPhone contract. (See Spotlight on Apple’s hidden revenue stream.)

That revenue isn’t lost, of course. It flows directly into Apple’s coffers, which have swelled over the past two years from less than $12 billion to more than $28 billion.

See Muller’s chart below (click to enlarge):



Because most analysts continue to track Apple’s EPS without taking this hidden revenue stream into account, says Muller, they’re missing the impact of a rising tide of cash.

Apple today trades at 17 times earnings per share, but only 8.5 times cash flow per share. “That’s a massive difference,” Muller writes. Apple shares have historically traded at 40 to 50 times earnings.

“In my opinion, the short-term economic challenges are priced-in,” Muller concludes. “But [Apple’s] long-term competitive advantage and earnings power is being ignored. … Eventually, when the economy shows signs of regaining its footing and investors are comfortable owning stocks again, AAPL will go much, much higher.” (link)

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By Philip Elmer-DeWitt
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