Samawi Earnings Research

What is money? According to the Merriam-Webster dictionary, money is "something generally accepted as a medium of exchange, a measure of value, or a means of payment." Most importantly, money also functions as a store of value, whereby it "must be able to be saved and retrieved at a later time, and be predictably useful when retrieved."

There are many different forms of money which may fit the above definition and requirements such as commodity money, fiat money, etc... The form of money that we are most accustomed to, and which we use everyday, is actually fiat money, with minimal intrinsic value (for example the worth of paper used in the $100 USD bill is a lot less than $100), but decreed by government order (where the word fiat in Latin means "let it be done").

If money becomes worthless, as occurred in Germany in 1923 due to hyperinflation, then one can actually argue that it is no longer money, despite being decreed by the government. Why? Because it is no longer a measure or store of value. When in 1923 a pound of bread cost as much as 430 billion German marks, one can even argue that bread is the money, the true store of value, determining the paper currency's worth. This is especially true when you consider the fact that the true nutritional value of a loaf of bread one hour after it was baked was roughly the same, while the amount of marks required to acquire it could have more than doubled in that same hour.

Placing legal considerations aside, why can't any entity (individual or otherwise) issue its own money? The truth of the matter is that if such entity has the credibility to meet the requirements for the definition of money, then it can. The keyword here is "credibility". The credibility for the money to be generally accepted as a medium of exchange, and to act as a store of value.

Source: digital editing by Bachar Samawi using images from Apple, Inc. and planetoddity.com

If we examine the valuation and liquidity metrics for Apple, Inc. (AAPL), we could determine that Apple is actually very qualified to issue its own currency. It has cash reserves (cash, short term and long term investments) in excess of $117 billion (which it can even convert into gold if it chooses), no debt, and constantly generates substantial free cash flow.

A good indication of a company's financial strength and its ability to meet its obligations is the current ratio (current assets/current liabilities) and quick ratio (which excludes inventory). As of June 2012, Apple had a current ratio of 1.6 and a quick ratio of 1.3. Typically, such ratios are healthy if they are between 1.5 and 3.0, while if such ratios drop below 1.0, they could indicate that a company could face a challenge in meeting its obligations if they came due at that point. When taking into perspective the fact that Apple also had over $89 billion in long term investments (excluding property, plant and equipment), such ratios remain quite healthy for Apple. It is also important to note that Apple had no long term debt, working capital of about $18.9 billion and free cash flow of about $35.5 billion.

Source: digital editing by Bachar Samawi using image from planetoddity.com

It seems Apple has the financial strength and metrics to actually deserve the credibility to issue its own currency and whereby such currency, backed by Apple's formidable balance sheet and products, would indeed be a good store of value. Many Apple loyalists may indeed be more than willing to put their trust in Jobs' legacy. As a matter of a fact, Apple's balance sheet is even stronger than Uncle Sam's balance sheet, with U.S. government debt currently standing at $16.2 trillion.

Perhaps Apple already has its own currency: its stock. It has used its own stock to compensate its employees, as do most other corporations. Meanwhile, despite its strong balance sheet, it has recently announced a share buyback program in order to keep the supply of its 'currency' under control. If Apple decides to make a major acquisition, it can potentially use its cash, or it can alternatively also use its stock. Any target company, given the strength of Apple's balance sheet and its reasonable valuations (as discussed in our article published on August 8, 2012 "9 reasons Apple shares will make new highs, again"), could be amicable to accepting Apple shares in lieu of cash. In a sense, Apple can print its own money.

Is Amazon in a position to print its own money? As of June 2012, Amazon's quick ratio is a mere 0.6 while its current ratio is 1.1. Both ratios reflect very low liquidity. Meanwhile, Amazon's working capital is $829 million, while its free cash flow is -3.6 billion. Although its cash stands at about $5 billion, it has no long term investments, and the difference between its accounts receivable ($2.4 billion) and its accounts payable ($10.96 billion) is about -$8.5 billion.

 

Given such metrics, Amazon would certainly love to print its own money and make such purchase in return for its own shares. It clearly is not in a position to print its own money, but if someone is willing to accept it, then why not... Would Texas

Instruments go for such deal? Logically, since we believe such currency is inflated, we would not expect Texas Instruments to go for it. However, stranger things have happened... Remember America Online's (AOL) acquisition of Time Warner (TWX)?

In 2000, America Online announced one of the largest M&A deals in history, when it entered into an all stock deal to buy Time Warner, creating a combined company valued at about $350 billion. At the time, AOL was trading at a P/E ratio in excess of 300. Given such rich valuation, it is not surprising AOL was happy to enter into an all stock deal, with an ownership ratio of about 55% for AOL and 45% for Time Warner, resulting in about 70% premium for Time Warner shares. Despite such advantage, the combined entity ultimately booked in excess of $ 99 billion in losses in 2002 (primarily in goodwill write-off).

 

It would be expected that the memory of such event should cause Texas Instruments to be cautious about an all stock deal with Amazon. However, history does tend to repeat itself, and

What is the significance of all this? If a company has the credibility to print its own money, as we believe Apple does, then it is probably a good investment, and investors who share our view may chose to buy Apple shares. On the other hand, if a company is actually considering printing its own money, while its balance sheet is weak and its valuation seems excessive, as we believe may be the case with Amazon, then it is probably best to avoid it; as per definition of money provided above, money that does not prove to be a good store of value is not real money after all...