Apple Computer AAPL
December 22, 2000 - 2:02pm EST by
2000 2001
Price: 14.50 EPS 2.34
Shares Out. (in M): 336 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 300 EBIT 0 0

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  • Multi-bagger


With shares trading around $14.44, Apple presents a significant buying opportunity, despite short-term problems. Apple has $4.027 billion in cash and short-term investments and $569 million in marketable securities (including investments in such companies as Akamai Technologies, Samsung Electronics, ARM Holdings PLC, and EarthLink Network) on its balance sheet, which nets out to $4.25 billion after subtracting the company's $300 million in long-term debt. This equals about $12.66 per share, and the stock is currently trading at only $14.44. Therefore, the operating business is being valued at just $1.77 or around $597 million, which is only 0.10 times next year's expected revenues of $6.0 billion. This appears to be cheap considering the company has an established business that has been highly profitable for a very long time (until this quarter) and represents one of the most recognized brand names in technology.

The cash is solid and the debt is insignificant, however the marketable securities portfolio appears to be concentrated in somewhat risky technology stocks. The average interest rate on the debt costs Apple 5.97%, while their portfolio of cash and equivalents is yielding 6.55%.

Substantially all of the cash and short-term investments have maturities of less than twelve months. The U.S. corporate securities include U.S. Government Agency notes, certificates of deposit, commercial paper and corporate debt securities. Foreign securities include foreign commercial paper, loan participations, time deposits and certificates of deposit with foreign institutions, most of which are denominated in U.S. dollars.

Share Repurchase Plan
In July 1999, the Board of Apple authorized a plan to repurchase up to $500 million of common stock. During fiscal 2000, Apple repurchased 2.55 million shares of common stock at a cost of $116 million, averaging $45.49 per share. If management believed the stock was undervalued at $45, then it could reasonably be assumed the stock is significantly undervalued at $14.44. Since beginning the plan, Apple has repurchased a total of 5.05 million shares of common stock at a cost of $191 million ($37.82 per share).

Recently, like all computer makers, Apple has been caught in a market where computer demand has slowed unexpectedly, subsequently leaving the industry with inventory gluts and lower than expected earnings forecasts. However, we feel in the case of Apple, all of the bad news, and then some, has already been priced into the stock. More importantly, with over 87% of Apple’s current market value accounted for in cash and securities on their balance sheet, buyers of Apple shares are not paying much for the business. Steve Jobs, founder and CEO, sought to reassure investors that Apple can weather the recent bad news, and even an extended downturn, because the company has so much cash. "We've clearly hit a speed bump," Jobs said. "Though this slowdown is disappointing, we have so many wonderful new products and programs in the pipeline, including Mac OS X early next year, and remain positive about our future."

Although the company’s overall market share in the educational sales market has declined, they have unveiled a new game plan. Forty percent of the sales force has been re-engineered, which happened to occur during the most critical season of the year for educational sales, to transition into a more direct sales model from a model heavily dependent on third party sales agents. As its newer staff gets up to speed, Apple will begin to rebuild its presence in schools. The overall market for education is only getting bigger as most schools are getting “wired” at a remarkable rate. Thus, even if Apple’s educational market share declines; the market itself will still be a large and growing number.

Another challenge facing Apple is their dependency on the ability of IBM and Motorola (the only suppliers of chips for their Macintosh computers) to provide a sufficient supply of chips with price/performance features that are comparable to those supplied to Apple’s competitors by Intel Corporation and the like. Apple has been unable to ship Macintosh systems with chips running above 500 megahertz since such systems were first announced in August of 1999 due to its suppliers inability to provide them with faster chips. Apple believes that this inability to obtain faster chips had an adverse impact on their results in 2000, particularly towards the end of the fiscal year. Apple has been informed by its suppliers that faster chips will be available in sufficient quantity beginning in the first half of calendar 2001.

Apple's strengths in design and usability play extremely well into the growing market for easy-to-use Internet appliances. Recently introduced products (including the Cube G4, a commercial flop) are still winning prestigious awards such as: CNET Editors’ Choice award and Home Office Computing’s “Product of the Year” award. The problem with their new innovative products, such as the Cube G4, is that they are quite expensive compared with their Windows counterparts. To combat this issue, the company is lowering its price point for the new products to encourage demand and increase sales. Because the company is a niche player and owns only a small share of the overall PC market, this price decrease is vital for Apple, as they need to keep loyal customers happy and encourage new ones.


Shares of Apple have plummeted from a high of $75 in April to a present-day low of $14.44, off 81%. Much of the decline is justified, however given the value of Apple’s assets, the drop has been clearly overdone. Cash accounts for more than 80% of the stock price, and the company still produces strong cash flow. According to Steve Jobs, ``We have an Arnold Schwarzenegger balance sheet, with over $4 billion in cash.” Furthermore, Apple enjoys a captive audience in that their users are fiercely loyal and the Apple brand name is renowned for innovation and style.
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