This Apple Is Sweet!

Apple just reported one of the best quarters in its history, with a spectacular performance by the iPhone – we sold more phones than RIM.  We don’t yet know how this economic downturn will affect Apple.  But we’re armed with the strongest product line in our history, the most talented employees and the best customers in our industry.  And $25 billion of cash safely in the bank with zero debt.

– Steve Jobs, CEO Apple

When I read through earnings releases by Google and Apple I always think about comic book super heroes with their ridiculous bulging muscles and teeny, tiny waists.  These guys just print money.

At it’s current price around $100 a share, Apple’s market cap is about $90.5 billion.  But, like Jobs says, they have $24.5 billion in cash and short term investments on their balance sheet – and no debt.  That’s not a misprint: $24.5 billion.  That works out to $27 a share.  So when you pick up Apple for $100, you’re really getting $27 in cash and short term investments and paying $73 for the business.

And that’s one sweet business.  We’re talking about $4.8 billion in net income over the last 4 quarters and $9.1 billion in free cash flow.  Because the iPhone has become a substantial revenue generator for Apple and because they account for it on a subscription accounting basis, net income actually now substantially understates the actual earnings of the real business.  For the first time this quarter, they reported “adjusted sales” and “adjusted net income” to reflect this.  If you take the midpoint of net income and free cash flow, you’re looking at say $7 billion in real earnings.

Since we’re paying $66 billion for the business, we’re talking about a trailing multiple below 10 and a forward multiple around 8.  For Apple.  For perhaps the best consumer products company on the planet.  That is RIDICULOUS CHEAP.

Last year, people were running over each other to own Apple and Google.  Now, with both more than 50% off their highs, the valuation is completely compelling – and nobody wants to touch them.  But rest assured: markets are completely efficient and rational 😉

Disclosure: Top Gun is long Apple (AAPL) shares.