Apple’s Valuation Looks Attractive Again

The recent drop in shares of Apple (AAPL) has probably been more pronounced than most expected. It’s true the stock was very expensive at its all-high of more than $200 per share (40 times forward earnings) but the catalyst for the sharp $80 per share drop we have seen recently was the company’s extremely conservative guidance for the current quarter. Apple always sandbags quarterly guidance, so this did not come as a surprise, but evidently investors were hoping they would have been a little less cautious. However, in this day and age, when quarterly guidance is given simply to help out Wall Street analysts, under-promising is the only way to go. This is true even more right now as the economic climate is highly uncertain.

Despite all the reasons to be worried, the fundamental story behind Apple is still strong. The company is gaining market share in desktops, notebooks, and cell phones, and is holding their lead in music players. The company will not be immune to a consumer led slowdown, but market share gains will allow them to hold up better than the competition. Given that, and the likelihood that Apple will earn well north of $5 per share during calendar 2008 (current consensus estimates stand at $5.27), the current share price of $119 looks very attractive is investors are willing to wait out the uncertainty in the economy.

Not only does Apple stock trade at only 22.6 times this year’s expected earnings, which will likely prove conservative as usual, but the company has quietly been building up a gigantic pile of cash. Apple hasn’t been buying back shares aggressively or making large acquisitions, so cash reserves are rising at a staggering clip. Shown below are the company’s cash balances as of the end of the last four fiscal years, as well as the last quarter. And keep in mind Apple has no debt whatsoever on its balance sheet.

Apple Cash Balances ( in millions of USD):

Sept 2004: $5.46 billion
Sept 2005: $8.26 billion
Sept 2006: $10.11 billion
Sept 2007: $15.39 billion
Dec 2007: $18.45 billion

Apple currently has $21 per share in cash, with no debt, yet another reason to be attracted to the current stock price after a drop of more than $80 from its high. Steve Jobs has been hesitant to part with his cash in recent years (the company had liquidity issues years ago before the iPod came along), but eventually he will accumulate so much that he will be forced to do something with all of it. Large acquisitions are a less likely option, but a huge stock buyback or one-time dividend would certainly excite investors.

Full Disclosure: Long shares of Apple at the time of writing