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You're viewing an article in TMO's historic archive vault. Here, we've preserved the comments and how the site looked along with the article. Use this link to view the article on our current site: Says Apple's Stock Is No Bargain Says Apple's Stock Is No Bargain

by , 3:40 PM EDT, May 11th, 2001 has published an article Thomas Lepris called Apple No Bargain as Crunch Time Nears. Many AAPL investors and Mac fans are going to take offense at the article, and that is in part because it ignores some fundamental facts and issues about Apple and the computer industry. That said, Mr. Lepris does bring up some very interesting issues that merit a closer look. For instance, Mr. Lepris says that far from making Apple an undervalued company, its large cash holdings actually make Apple's valuation make even less sense. According to the article:

The most common defense of Apple's value is its considerable cash reserves. As of March 31, the company had $4.1 billion in cash and short-term investments. That works out to $12.21 a share in cash, a solid floor for the company's stock. And bulls point out that if you discount all that cash, Apple looks very cheap. The stock closed Thursday at $23. If $12 of that is cash, the market is valuing the enterprise itself at just $11 a share.

The question is largely academic. No one at Apple is about to break up the cash from the rest of the company. Indeed, it will need to start spending when it starts building its retail stores. Still, carrying the argument through to its conclusion produces surprising results. Apple earns a considerable sum of interest on its cash, so valuing the enterprise apart from that cash would necessarily involve omitting that income. GKM's Bailey, for one, expects Apple to earn 60 cents a share in fiscal 2002. But when he excludes interest and other income, his estimate drops to a mere 21 cents a share. On that basis, Apple is currently trading at an incredible 52 times its 2002 earnings.

It's true that Bailey is less optimistic than many other analysts. But even more mainstream views make the same point. Subtracting interest and other income from's consensus estimate of 77 cents a share leaves Apple's estimated 2002 earnings per share at 38 cents. Using that figure, the market is valuing Apple's enterprise at 29 times its 2002 earnings. As it stands right now, forgoing the clumsy exercise of valuing the company apart from its cash, Apple is trading at just under 30 times 2002 earnings estimates.

In other words, separating the cash from the enterprise does nothing to make Apple look any cheaper.

An interesting argument to be sure. There are many other issues covered in this article, and we recommend you check it out.

The Mac Observer Spin:

This article makes a very good case for dissing Apple's value based on a number of technical considerations. At the same time, it completely ignores Apple's ability to change the direction of the industry, come up with solutions that work, and to think far ahead of the rest of the PC industry. It also ignores the fact that Apple is not subject to the same types of downward pricing pressure that the company's PC brethren are. Still, Mr. Lepris' points should not be dismissed. His analysis is interesting, and it takes into consideration some things that many of us who are Apple fans don't think about.

One last thing, and we honestly don't mean this to be mean spirited, but we simply can NOT resist: It must be tough being in the financial biz and being named Tom Lepris. That's just a rhyme away from "You can make *more* money buying and selling stocks..." "I bought and sold stocks out of my *tiny*, *one* bedroom apartment..."

People can be so mean... :-)

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