How much is Apple’s lack of debt worth?

“It’s very common to see articles talking about valuation of Apple (AAPL). Usually these articles will talk about Apple’s earnings, cash reserves and strong brand name, among many other things,” Jacob Steinberg writes for Seeking Alpha. “One thing that never gets mentioned when Apple’s valuation is being calculated is the company’s lack of debt. As of right now, Apple has zero debt. Shouldn’t this be worth something?”

Steinberg writes, “Apple’s current price tag is $515 billion, which comes with $120 billion in cash and over $40 billion annual earnings. Because the company has no debt, the valuation of the company looks absurdly low. If I had $515 billion to spare, I would go ahead and buy Apple within a heartbeat. This is one of those giant purchases that don’t come with the so called buyer’s remorse.”

“Apple’s fair P/E ratio looks to be around 20 when one ignores the fact that the company is debt free. After factoring in the company’s lack of debt, the valuation should change dramatically,” Steinberg writes. “In the technology industry, many companies have large loads of debt and they spend a large portion of their income to service this debt. Because Apple doesn’t have that problem, its fair value should be much higher than its current price. It is fair to say that Apple is as cheap as it gets.”

Read more in the full article here.

27 Comments

    1. He gets “something” but Apple’s P/E is 12 right now, back out the cash and I think it’s around 9 (maybe as low as 7). Unbelievable.
      Meanwhile, Amazon which makes no profit has a P/E around 3000. Clearly, it’s not about fundamentals. All this being logical and applying finance knowledge is hopeless.

      It’s not clear to me but I guess he’s saying Apple’s P/E should be about 20, instead of currently is 20 – maybe. If so, I’d say he is mostly correct except that reality and the other “rules” don’t seem to apply to Apple. A P/E of 20 would put the stock price well over 700.

      The way things are going, Apple’s cash will some day over take their market cap and they can buy all their stock back and go private.

  1. I agree with the notion that Apple is greatly undervalued. Also, I would assert that Amazon is greatly overvalued. However, the stock market is a crazy bitch! In the end, something is worth whatever somebody else is willing to pay and today, that is about $530 per share of Apple.

  2. Having zero debt is part of what allows Apple to be a risk taker. iPhone was a big risk. iPad was a big risk. “iTV” will be a big risk.

    Having a huge cash pile means Apple can finance new ventures without assuming debt. And not having to assume debt mitigates the risk of creating something new and unproven like iPad. If iPad had failed, at least Apple would not be paying interest on their failure for years, and potentially bankrupting the company. A debt-ridden company (like Palm) would have to “bet the farm” on their new product.

    And that’s why everyone else waits for Apple to take the risk, and then copies whatever is successful. Most of Apple’s competition can’t afford to be wrong.

  3. All these articles seem to be beating a dead horse. Apple’s market value continues to drop no matter how much wealth Apple actually has. Personally, I think all they do is frustrate Apple shareholders all that much more. All the wrong people seem to “get” what Apple is worth. Those investors that matter don’t seem to give two sh!ts and continue to pull out their money. Maybe things will change around in a month or so, but who knows.

    As the man says “something is worth whatever somebody else is willing to pay” and the market is saying Apple isn’t worth much now and will be worth less later. There’s no point in arguing about the reality of the situation. I could easily sell my Apple stock and buy Amazon stock but I just can’t do it. That doesn’t make any sense to me whether I’m making a mistake or not. I’m being held in check by what I consider my common sense, but maybe that’s just my stubborn stupidity. I’ll just go curse my luck and go stew in a corner somewhere and hope things turn out better tomorrow for Apple. I’ve certainly lived long enough to know that life isn’t always fair.

    You’ve probably heard the saying about how the bulls make money and the bears make money, but the hogs get slaughtered. I guess Apple is the biggest hog in the market and it’s time for the rest of the market to roast the pig and feast off it.

    1. As Bill Parcells once said “a team is only as good as it’s record”. By that he meant no to all those people who say “but they’re really better than the record indicates”. As someone stated above, “something is only worth what someone is willing to pay for it”. Truer words will never be spoken. How many athletes have we seen with “unbelievable potential”? Hundreds. Apple is a fantastic company. It is fundamentally solid and light-years ahead of most companies in the way it functions. But that doesn’t mean that it is worth $706 per share. Not unless the public wants to buy it at that price. And that’s not manipulation either. Was it manipulation that got it to $706? No. It was great products and great sales along with tremendous revenue and margins. But it was also emotion. Not necessarily hype, but rather emotion. Apple made the best and everyone wanted it. It was as they said the “cool factor”. They still make the best but other companies are becoming competitive. So they don’t have the world to themselves anymore. Obviously, that had to happen eventually. So it has. It’s still the coolest thing out there to the Apple faithful but to the rest of the world it’s just a device. Doesn’t matter whether it’s a phone, tablet, laptop, MP3 player or desktop. I own or have owned practically everything Apple has
      made for decades and I make my living with Macs but I am the
      exception. Somebody is buying all those Android phones. And it doesn’t matter if they’re dummies, when they buy an Android phone they’re not buying an iPhone. It’s as simple as that. I’m not saying that Apple is Sony but it can’t keep climbing the way it has forever. That’s just common sense. Apple has had it’s bad times in the past and recovered nicely. Personally, I think it will do so again. I believe it is going to drop more before it starts going up again. The “experts” seem to think $505 is very possible next week. Only time will tell. And I’m not sure how soon it might ever reach $706 again? But if it does go up that won’t be manipulation either. It will simply mean that people believe it’s worth that much money. A good earnings report in January should make things much better. But I do believe that Apple has taken hits this time that will linger into the future. I believe that there will be much less emotion to drive the stock in the future. I believe it will grow slower than in the past few years but that’s
      inevitable. And when it does get high enough, learn to take your profit. Don’t let this happen to you again. Apple isn’t your best buddy. Don’t get all emotional about Apple. It’s just a stock, it’s just a company but it’s your money. You invest to make a profit.

      1. Good analysis from the business/consumer perspective. But there’s a market perspective, too. A P/E ratio of 10 is ridiculously low for a growth company. They usually run 150 – 300% of Apple current P/E. factor in that most people are willing to assume a relatively significant amount of risk associated with the growth prospects of the companies they buy into. Apple holds significantly less risk — partly due to the lack of debt, partly due to the abundance of cash, partly because they’ve proven their ability to grow. A lot of companies get their high multiples based upon growth projections.

        The cash could be holding the price down — with a guaranteed rate of return of a fraction of a percent, limiting the company’s overall equity returns. But that’s not enough to explains such a low multiple.

        I think, if they split the stock 10:1, they would significantly increase both number of shareholders and demand for the stock — driving it closer to where it belongs. From a purely financial standpoint, a split doesn’t really do anything. In Apple’s case, the impact would be as a result of significantly greater demand to purchase the stock by John and Jane Q Public, instead of just fund managers. That might help to even out some of the ridiculous swings in the stock price, too.

        1. I’ve invested for a long time. I understand the fundamental and technical aspect of AAPL. “Driving it closer to where it belongs”? It belongs exactly where it is on Friday. Because that’s where the market put it. We may want it higher but wish in this hand………….. It is what it is, live with it. For now. Does it deserve to be $706? Does it deserve to be $1000? Does it deserve to be $2000 per share? Would that be manipulation? Would the analysts suddenly all become geniuses? Does my favorite sports team deserve to win every game? If my team loses a game is the other team cheating? If I like a team why can’t it win every game? Why not? Because that’s not reality that’s why. If AAPL deserves to go much higher, it will. Investors and fanboys are caught up in the surge that has been going on for the last few years. It just can’t keep doing that. I don’t care how good the revenue and margins are. They have not had good earnings reports the last two quarters. And yes, I understand that everyone wants to blame the analysts. A bit true on the last earnings report, but it still wasn’t a great earnings report. And the stock can’t keep going straight up on less than great earnings reports. That’s simply reality. But the next earnings report in January looks to be stellar. But it could surprise on the downside, no one really knows yet? Do they? A 10 for one split would really help the stock price however that’s not likely to happen. Apple is just too big to keep growing as it has recently. It is true what they say about the law of large numbers. But it can continue to go up. Just don’t look for astronomical growth other than in spurts occasionally. And don’t buy into all the complaining about how the stock is being manipulated. That’s people who didn’t get out at or near its recent high and are underwater or have lost a tremendous amount of their profit. You don’t have to be a daytrader to know when to take profit and wait for a better reentry point. That’s pretty simple. That’s just basic investing. Buy low sell high. You can be a buy and hold investor if you want but look what just happened. A $200 per share drop. I checked out at $700 even. And I’ve been in AAPL forever. I just don’t hold it forever. That’s $200 per share left on the table. Sorry, I just can’t do that. And trust me, I do understand “the market perspective”.

  4. is the US trillions debts a good thing? and why are we trying to solve
    the fiscal cliff, to trim our debts? Then, it must be better without
    debts, just like Apple is lack of debts now, isn’t it.

    1. I’m guessing not. It should really be a wash. Sell to capture the current gains and lock in the lower cap gains tax rate. Reinvest in something. Over year end and buy it back next year. Have to avoid “wash sale” rules, but a 23% difference in cap gains rates between now and Jan 1 is a pretty powerful motivator.

  5. The stock market today is run by machines with no concept of business or profits or debts. Apple has shown itself over and over again but the machines keep bringing Apple’s stock down, down, down for absolutely no reason. Excuses are made up but they are so full of shit! I have no more respect for the market as it is run today.

  6. Apple could benefit from a lower valuation if its strategy is to maximize use of its cash reserve to buy back shares.

    Not to get into conspiration theories, but woudn’t Apple itself be fueling this valuation decline ( free fall) for that very purpose ?

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