Each day that passed in the third quarter added about $22 million to the Apple Inc. (AAPL) cash stash. Ironically we are 22 days into the fourth quarter. That means Apple has added in the neighborhood of $484 million more to what is an ever increasing percentage of the company.
The company's capitalization stands $282 billion.The cash is a drag on earnings. At the end of Q3 it equaled almost 18% of the value of the company. Considering it is the second largest company behind Exxon Mobil (XOM), for now, the bigger it gets, the more it resembles an anchor and not a safety net.
There are many that feel Apple stock remains undervalued even at Friday's closing price of $307.87. The P/E ratio is 21.31 for the trailing twelve months and it is projected to shrink to 17.33 going forward. This does seem too low, and appears even more so when noting the PEG ratio of 0.91. Under one, how could this be? Certainly this is a growth stock that is worthy of a much high multiple, yet the PEG is that of a value stock. Many are asking why? What are Wall Streets misgivings?
In part, it relates to the cash. What P/E ratio would you assign to cash? The cash is only making a very modest return, low single digits at best and any inflation would reduce the value. Since the cash portion of the company is growing, the P/E ratio is affected by it more with each passing day. The only way to change this is to buy back company stock, reduce the cash by acquiring an asset with equally strong margins and growth potential, or issue a dividend. The first two seem like a possibility. Apple is on record that a dividend is not happening. However, maybe this might be revisited.
Perhaps Apple should decide what percent of the company's assets or capitalization should be cash and short term instruments and make periodic distributions, annually or bi-annually, to maintain that level. If alternatives don't present themselves, or in the absence of some action, the P/E ratio may continue to go down, not up. If they want to be a bank then they will have the P/E ratio of one.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value™ and Serious Money. Disclosure: He owns no shares of AAPL..