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I have no knowledge of the financial world, so maybe someone can help me with this and what it means... Apple is now a $50b/quarter company, with a $480b (edit:

by Osmium 14y ago

I have no knowledge of the financial world, so maybe someone can help me with this and what it means... Apple is now a $50b/quarter company, with a $480b (edit: now $430b) market cap and $140b in cash. Surely this means that, within a few years, Apple will have enough cash to buy itself? This seems like a dangerous situation for a company to be in. For whatever reasons, there seems to be little confidence in Apple lately, but it can't be denied that they're still making substantial growth quarter over quarter. Is this current situation not unsustainable? Edit: thanks everyone for the explanations, it's very much appreciated

recoiledsnake 14y ago
>Apple is now a $50b/quarter company That's revenue and can't buy anything with revenue since you have to pay for the salaries, hardware, stores etc. You should look at profit which is $13B/quarter right now.
- Osmium 14y ago
  Thanks for the correction -- but doesn't this still mean that, if Apple completely plateaus and they have no more growth whatsoever, Apple would still reach its current market cap ($430b) in cash within about 6 years? And this is presumably an overestimate because its current stock price probably has further growth priced into it, so either Apple will reach that target sooner as a result of an increase in profits or, if profits remain the same, their market cap will fall further? I'm just not sure I understand the implications of a company acquiring so much cash that it matches its own market cap. I ask because, this fact alone, seems to suggest to me that they're very much undervalued right now. But I'm not sure if I'm missing something.
  - kryptiskt 14y ago
    Why do you think the stock will stay level? Investors take cash on hand into account. Also, Apple is distributing some cash as dividends. Stocks seldom trade under the book value of the company, but it sometimes happens. The business may be bad and the stock is just anticipating, or the book value may be hard to realize in cash (hard to cash in on goodwill)[1]. None of that applies in Apple's case. [1] And very occasionally there is something that is just that much undervalued.
  - bjacokes 14y ago
    A price/earnings ratio of 10 is fairly common for blue chip stocks. It certainly isn't priced for growth, so presumably investors think that Apple's earnings have a risk of plateauing. Given how high Apple's earnings are, there's certainly an argument to be made that they can't go much higher without another big hit. Keep in mind that earnings != cash. If you look at their full SEC filing, their net increase in cash was $5.4 billion. Some of that money will be directed towards future R+D, some toward a dividend, and some will stay in the bank or used for acquisitions. Companies with a healthy balance sheet and a lot of cash, like Apple, will either pay a dividend or buyback shares long before the book value of the company (cash + other assets - debt) is greater than their market cap. The market cap is more likely to be close to the book value for a struggling company, in which case the company is at risk for a private buyout + liquidation.
  - jussij 14y ago
    > I ask because, this fact alone, seems to suggest to me that they're very much undervalued right now. But I'm not sure if I'm missing something. But you're forgetting one other possibility and that is there income starts to trend downwards due to falling sales and falling market share. Under that scenario they would eventually start to loose money and start burning into their cash pile. Emotions play a big factor in the movements of share price and at the moment there is a fear Apple will continue to lose market share to players like Samsung and Google. Will that happen? Only time will tell. But don't think it can't happen. You need to look no further than companies like Research in Motion, Sony or Nokia to find companies that had massive market share only to see it eaten away by competition.
aqme28 14y ago
Fast forward a few years to a hypothetical future where Apple is the exact same company but with $500b in cash. All other things being equal, their stock will be more valuable (and hence market cap higher) because each share also controls a share of all that cash. If they have more cash than market cap, something is wrong. Either you should buy Apple, or they have a lot of debt.
- bjacokes 14y ago
  True -- although in that hypothetical situation, there'd be a lot of pressure to raise the dividend. Investors don't want to have money in such a cash-heavy company, because it's like investing in a mutual fund that takes half your money and sticks it under a mattress. Even if they do good things with the other half of your money (like Apple does) you're halving your potential return right off the bat. Cash in the bank is useful when you need liquidity (unprofitable, danger of recession, potential acquisitions, etc) but $500B is still too high for any of those needs.
hazov 14y ago
If growth remains the same I believe people would not complain but it cannot "buy itself" in this scenario, the market would adjust for reserves the company has and the market capitalization would move accordingly. If growth begin to stall with their reserves there probably would be a pressure from those with voting rights in the company for the company to pay more dividends on the profit. If that do not happen the company could announce a buyout of all its shares and if everyone agrees it can go private if it wishes. EDIT: Adjusting the 2nd paragraph.
bonaldi 14y ago
Apple can't "buy itself" with its cash any more than you can use your credit card to pay your credit card bill. Apple is owned by its shareholders. That cash pile ultimately belongs to them. To "buy itself", it would have to purchase itself from its owners. It can't use their money to do that, can it? (NB: Don't get confused by stock buybacks: they keep the value of the company the same, they just concentrate it in fewer shares. It doesn't transfer the ownership from shareholders to "Apple")
- fleitz 14y ago
  It's easy to pay a credit card with a credit card, you go to an ATM take out the minimum payment, and then go to the teller with the cash and make the payment. If you have two credit cards or online banking you can do it from home. I've bought houses on credit cards, you just need the right paperwork and the knowledge of how financial leverage works. The primary reason why APPL can't buy itself back with $500 billion in the bank is because not everyone wants to sell, and would only sell if they were offered a premium such as $750 billion. If AAPL wanted to buy itself it would use a leveraged buyout. It's certainly in a position right now to buy itself. GS, etc would love to issue an interest paying loan and/or bond to AAPL for $750 billion instead of having it in T-bills paying nothing.
  - bonaldi 14y ago
    I'm talking about paying off a credit card with the same credit card. And the leveraged buyout, yes, the board could pretty much raise the cash to buy control -- but, and this is the point, they couldn't do it with Apple's cash pile, which is what the OP was suggesting.
    - meric 14y ago
      Actually, they can. They can offer a deal with shareholders where at the end of it Apple's cash pile will go to the shareholders instead of staying in the company. Typically this means the price of buying the company is reduced by that much, which is practically using Apple's cash pile to partially pay for Apple.

by Osmium 14y ago

recoiledsnake 14y ago

>Apple is now a $50b/quarter company That's revenue and can't buy anything with revenue since you have to pay for the salaries, hardware, stores etc. You should look at profit which is $13B/quarter right now.

Osmium 14y ago
Thanks for the correction -- but doesn't this still mean that, if Apple completely plateaus and they have no more growth whatsoever, Apple would still reach its current market cap ($430b) in cash within about 6 years? And this is presumably an overestimate because its current stock price probably has further growth priced into it, so either Apple will reach that target sooner as a result of an increase in profits or, if profits remain the same, their market cap will fall further? I'm just not sure I understand the implications of a company acquiring so much cash that it matches its own market cap. I ask because, this fact alone, seems to suggest to me that they're very much undervalued right now. But I'm not sure if I'm missing something.
- kryptiskt 14y ago
  Why do you think the stock will stay level? Investors take cash on hand into account. Also, Apple is distributing some cash as dividends. Stocks seldom trade under the book value of the company, but it sometimes happens. The business may be bad and the stock is just anticipating, or the book value may be hard to realize in cash (hard to cash in on goodwill)[1]. None of that applies in Apple's case. [1] And very occasionally there is something that is just that much undervalued.
- bjacokes 14y ago
  A price/earnings ratio of 10 is fairly common for blue chip stocks. It certainly isn't priced for growth, so presumably investors think that Apple's earnings have a risk of plateauing. Given how high Apple's earnings are, there's certainly an argument to be made that they can't go much higher without another big hit. Keep in mind that earnings != cash. If you look at their full SEC filing, their net increase in cash was $5.4 billion. Some of that money will be directed towards future R+D, some toward a dividend, and some will stay in the bank or used for acquisitions. Companies with a healthy balance sheet and a lot of cash, like Apple, will either pay a dividend or buyback shares long before the book value of the company (cash + other assets - debt) is greater than their market cap. The market cap is more likely to be close to the book value for a struggling company, in which case the company is at risk for a private buyout + liquidation.
- jussij 14y ago
  > I ask because, this fact alone, seems to suggest to me that they're very much undervalued right now. But I'm not sure if I'm missing something. But you're forgetting one other possibility and that is there income starts to trend downwards due to falling sales and falling market share. Under that scenario they would eventually start to loose money and start burning into their cash pile. Emotions play a big factor in the movements of share price and at the moment there is a fear Apple will continue to lose market share to players like Samsung and Google. Will that happen? Only time will tell. But don't think it can't happen. You need to look no further than companies like Research in Motion, Sony or Nokia to find companies that had massive market share only to see it eaten away by competition.

aqme28 14y ago

Fast forward a few years to a hypothetical future where Apple is the exact same company but with $500b in cash. All other things being equal, their stock will be more valuable (and hence market cap higher) because each share also controls a share of all that cash. If they have more cash than market cap, something is wrong. Either you should buy Apple, or they have a lot of debt.

bjacokes 14y ago
True -- although in that hypothetical situation, there'd be a lot of pressure to raise the dividend. Investors don't want to have money in such a cash-heavy company, because it's like investing in a mutual fund that takes half your money and sticks it under a mattress. Even if they do good things with the other half of your money (like Apple does) you're halving your potential return right off the bat. Cash in the bank is useful when you need liquidity (unprofitable, danger of recession, potential acquisitions, etc) but $500B is still too high for any of those needs.

hazov 14y ago

If growth remains the same I believe people would not complain but it cannot "buy itself" in this scenario, the market would adjust for reserves the company has and the market capitalization would move accordingly. If growth begin to stall with their reserves there probably would be a pressure from those with voting rights in the company for the company to pay more dividends on the profit. If that do not happen the company could announce a buyout of all its shares and if everyone agrees it can go private if it wishes. EDIT: Adjusting the 2nd paragraph.

bonaldi 14y ago

Apple can't "buy itself" with its cash any more than you can use your credit card to pay your credit card bill. Apple is owned by its shareholders. That cash pile ultimately belongs to them. To "buy itself", it would have to purchase itself from its owners. It can't use their money to do that, can it? (NB: Don't get confused by stock buybacks: they keep the value of the company the same, they just concentrate it in fewer shares. It doesn't transfer the ownership from shareholders to "Apple")

fleitz 14y ago
It's easy to pay a credit card with a credit card, you go to an ATM take out the minimum payment, and then go to the teller with the cash and make the payment. If you have two credit cards or online banking you can do it from home. I've bought houses on credit cards, you just need the right paperwork and the knowledge of how financial leverage works. The primary reason why APPL can't buy itself back with $500 billion in the bank is because not everyone wants to sell, and would only sell if they were offered a premium such as $750 billion. If AAPL wanted to buy itself it would use a leveraged buyout. It's certainly in a position right now to buy itself. GS, etc would love to issue an interest paying loan and/or bond to AAPL for $750 billion instead of having it in T-bills paying nothing.
- bonaldi 14y ago
  I'm talking about paying off a credit card with the same credit card. And the leveraged buyout, yes, the board could pretty much raise the cash to buy control -- but, and this is the point, they couldn't do it with Apple's cash pile, which is what the OP was suggesting.
  - meric 14y ago
    Actually, they can. They can offer a deal with shareholders where at the end of it Apple's cash pile will go to the shareholders instead of staying in the company. Typically this means the price of buying the company is reduced by that much, which is practically using Apple's cash pile to partially pay for Apple.