Buy, Sell or Hold: 100 Billion Reasons To Buy Apple Stock

Email

Apple Inc. (NASDAQ: AAPL) is one of the world's largest companies based on market capitalization.

Cupertino, CA-based Apple just released one of the best earnings reports in the history of capitalism.

In short, they crushed it-sending Apple stock to a fresh 52-week high.

Take a look:

In a record setting first quarter, Apple sold an astounding 73 million devices, including:

  • 5.2 million Macs.
  • 15.4 million iPods.
  • 37 million iPhones.
  • And 15.4 million iPads.

Keep in mind that's just devices. Apple also takes a 30% cut of all the music, apps, movies and books sold in the online iTunes Store, and its retail operation is a gem within itself.

All told, it's a remarkable growth story – and one that's far from over.

But that is only part of why you should buy Apple stock. Its balance sheet boasts 100 billion more reasons showing the company is a solid "Buy."

Ironically, Apple has so much cash its stock could actually be considered cheap.

Apple reported $97.6 billion in cash, but given the rate the company was selling products in the fourth quarter, that figure is surely higher now.

Today, Apple's cash-on-hand has to be around $100 billion. This mounting pile of cash has been the source of much speculation in recent years, and the issue was again raised by analysts last week during the earnings conference call.

Judging from Chief Financial Officer Peter Oppenheimer's response, it was clear the company has plans for it.

According to Oppenheimer:

"We're examining all uses of our cash balance, what we might do in the supply chain, what we can do from an acquisition perspective and otherwise. Since I don't have any perspective to share with you today, specifically on dividends or buybacks, other than again, we are actively discussing the cash balance."

It's my expectation Apple will surprise the market by deploying its cash hoard in a mergers and acquisitions (M&A) spree that helps reform its product development.

At this point, the cash is pouring in too fast to pay out dividends and buy back stock. They need a strategy to buy technology, like ARM Holdings PLC (Nasdaq: ARMH), which Apple helped found in 1990 and now sources chips from.

Big Apple
Apple has a track record of making small strategic acquisitions, such as chip designer P.A. Semiconductor in 2008 (which allowed Apple to design the A4 and A5 chips used in the iPhone and iPad), and music service Lala in 2009, which provided technology for iCloud.

So what Apple decides to do with its cash in the near term will ultimately determine what impact the company will have on our lifestyle in the future.

That's why I believe it's time to buy Apple Inc. (**) – as it works to deploy its cash and continue enhancing the user experience for its customers.


Apple Stock is a "Buy"

When you get down to it, all you need to know is that Apple:

  • Is debt free;
  • Has about $100 billion in cash;
  • Is growing demand at a rate of 100%;
  • And will be putting its cash to work in the future.

Apple is unique among companies in that it could be rated AAA if it wanted to issue debt. Logically, though, why would it? It's built up the largest cash position in history.

In fact, it's the sheer size of the cash hoard that makes this company so interesting. Apple has enough money to change entire industries just by its business demands.

Today, Apple has grown into the largest consumer of chips in the world. Their lineup of tablets, computers, and cell phones has grown to such a degree that the mobile computing trend that Apple launched and dominates is now the driver of chip designs for the future.

This is where I believe Apple will be putting its cash to work. Apple doesn't need to buy back shares or pay a dividend if it has a better use for that cash.

I expect to see Apple purchase chip designers and invest in its capacity to manage its product-line sourcing. I think its next major product will see its early product cycle kept in-house.

Meanwhile, the growth rates at Apple are simply staggering. iPad revenue increased by 100% year-over-year in the fourth quarter alone, while iPhone revenue increased by 133% year-over-year.

You can expect this to continue as Apple cranks out more unique and compelling products in the years ahead.

Action to Take: Buy Apple Inc. (NASDAQ: AAPL) (**)

Apple has the capacity to change the lifestyle of its consumers. While Steve Jobs is no longer around, his impact will be felt for years to come.

In a world of uncertain economic outcomes, Apple rises above the storm as a safe location to park capital. While it currently does not pay a dividend, that could change soon. Even if it doesn't, the rate at which the company is building up its cash hoard allows an investor a comfortable night's sleep. Apple is about as safe a company as you can invest in.

Let's pick up 50% of our Apple shares in the near future, with the rest entered as good-"til-cancelled around the breakout area of the latest earnings report. This should be retested at some point and will give a patient investor a good location to add to their long-term holdings.

(**) Special Note of Disclosure: Jack Barnes has no interest in Apple Inc. (NASDAQ: AAPL).

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department – just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Petroleo Brasileiro SA (NYSE ADR: PBR).

News and Related Story Links:

Join the conversation. Click here to jump to comments…

  1. c0nd3mn3d | January 30, 2012

    why do people continue to do this? it really ceased to be witty after perhaps the third time we all heard anything like it, which milestone we all long ago reached. each individual dollar does not represent a separate reason to buy apple stock. geesh…

  2. oa | February 5, 2012

    do you see any competition coming???

  3. oa | February 5, 2012

    How about goog & msft entering the AAPL's market ? Is that a concern?

  4. ade | March 31, 2012

    If apple stock isn’t overvalued, why are so many fairytales written to justify its price which appears to be in a bubble stage considering its $254 billion increases in capitalization in the last year. The assumptions made why apple stock is undervalued are unbelievable. Forecasting future earnings from historical trends are not always accurate, especially when the data is suspect. It was not long ago the herd believed that house prices could never go down but would continue to increase rapidly year over year. Just as the apple cheerleaders believe its stock price cannot decline, but will continue to increase. Many analysts quote Apple’s sales potential growth rates to be 20% or more annually for the next five years to justify why its current share is undervalued.

    Rarely, is apple net income ever mentioned. Apples net income from the past five years, from 2007 to 2011 is approximately 56.5 billion. A major jump in sale and income came in 2010 to 2011 when its net income increased by 11.91 billion.

    Apples Net income

    2007 3.50 billion Net Income growth from previous years.
    2008 4.83 billion 38.27 %
    2009 8.24 billion 70.36%
    2010 14.01 billion 70.16%
    2011 25.92 billon 84.99%

    What is never asked is how a company with a net income of 25.92 billion in 2011 can have achieved capitalization of 565.9 billion. Apple’s unsustainable income growth is beginning to slow, but this does not stop its promoters from developing deceptive forecast about Apples future growth citing its relatively low market share of worldwide computer, Smartphone and Tablet sales.

    One must ask who is paying these analysts for these deceptive forecasts. Could it be the herd on Wall Street that has mortally damage the US Economy by all the financial instruments which were developed, supposable to limit risk, but were merely another device which allows them to hedge their bets and steal.

    I am not surprised that the 70% of Apple’s stock is owned by institutional investors which have created another bubble as there are limited investment alternatives. Apple stock was primed for this collusion, due to it past growth and the difficulty in evaluating its most important characteristic which is the marketing of its products.

    This is an intangible asset akin to Goodwill which is very difficult to evaluate There is a reason, Apple’s sales are less than its competitor and that is due to their products considerably higher cost , which in many cases are functionality no better than their competitors.

    I remember my first computer cost over S2500. Today, a superior system can be bought for less than $400. This directly related to Apple’s value and alleged income growth potential. Just as computers, big screen TVs and many other electronic devices have been commoditized, so will apple products if they wish to capture additional market share and stay competitive.
    It is not likely Apple’s can continue to increase its net income by 85% a year or for that matter by 20% a year for the next five. Apple’s 2011 net income was approximately 26 billion. This is a massive amount of money. An increase of 20% equals 5.2 billion gain in net profit. This buys quite a few Ipads, downloads and other apple products. Really, how more Ipads, Ipods and other Apple products can the market absorb without a significant cut in their price.

    In addition, the more affluent market have been saturated with apple products, leaving the less capable market the task of buying all though millions products which are forecast to be manufactured and sold by apple in the coming years.

    Essentially, a cut in pricing will affect Apple’s bottom line, which is net income. Net income is very useful in determining an asset or company value. In addition, the use of net income is a more accurate than utilizing earnings with manipulated PE ratios to determining a value.

    It is very likely Apple’s net income will stagnate, due it considerable size, competing products and the fact it will have to lower its pricing to achieve significantly more market share.

    Apple average net income over the last 5 years is 11.3 billion. This income average would typically be utilized to estimate a value. But let use apple’s most recent report net income which is 32.98 billion. If a capitalization rate of 10% is used Apple’s value can be estimated by:

    32.98 Billion / .10 % ? 323 billion.

    Now a price share can be determined by dividing the outstanding share which is approximately 932 million into 323 billion.

    323 billion / 932 million = $363 per share

    This is a more realistic value for Apple’s as its past growth is not sustainable nor is a significant increase in it net income likely. How did Apple’s capitalization increase by 254 billion over the last year, the majority of Apple's capitalization came from Hedge funds and Money managers who have driven apple stock price to an irrational level s due to their herd likely mentality.
    It is not surprising that apple now is offering a dividend and is buying back its stock so that it can keep the stock price artificially high. But why are they waiting till September to begin the buy back. Maybe, their analysts see a drop coming and can acquire more shares for the reported 100 billion buy back… You know Apple is very innovative.

    Maybe, Apple stock price can maintain this level for a period time, but it very likely it can’t because its price has been inflated by Speculators that created another Bubble which will eventually hurt the uninformed and possible many retirement funds.

    My analysis indicates apple current capitalization is overvalued by approximately 200 billion. My advice is to sell apple stock now as it current capitalization is based on intangible asset, and improbable income growth rates. For all the Dimwits that have recently purchased Apple stock my condolence.

    I know my comment will probably fall on deaf ears, but at least I made an effort to bring another perceptive on Apple’s irrational stock price.

  5. Brent | April 7, 2012

    Disagree

  6. Khalid | April 18, 2012

    I have been trading this stock for awhile now. I got alerted well before the volume started to pick up. Thanks to the geek I was able to score a nice profit a few times already. He sent me a report that helped me figure out the pros and cons of this company. It’s best to buy penny stocks before everyone else does. Check it out at http://www.pennystockgeek.com (Kindly, copy and paste the link in to your browser.)

Leave a Reply

Your email address will not be published. Required fields are marked *

Some HTML is OK