I wrote earlier today about why I believe Apple will be fine despite Steve Jobs’ surprise leave of absence. And, overall, it seems investors agree (at least at current market value) with the stock falling just 2% after trading down nearly 7% in after-markets the night before. Despite this, I’ve noticed many fear mongers out there advocating the all out demise of Apple with no real look towards the stock’s valuation.
The surprise news definitely clouds some of Apple’s longterm revenue visibility (just ask retailers what happens when investors are uneasy about the future), but this doesn’t necessitate a meltdown in share price if the valuation adequately discounts worries about the future.Â
Apple’s share price already implies a near doomsday scenario
Apple currently has $27.54/share of cash and short term investments. Net working capital currently creates $4.38/share of cash. Assuming a wind down of this business would require a working capital reserve of $5/share to pay down the negative net working capital, this leaves approximately $22/share of cash on the balance sheet which can be considered “distributable” to shareholders. Given today’s closing price of $83/share, that would imply that the value of Apple’s future cash flows is just $83 - $22 = $61/share.
From the above table, you can see that Apple’s share price currently implies two highly pessimistic scenarios.
1. Free cash flows will immediately decline 27% from last year and never grow againÂ
2. Free cash flows will fall 5% annually until it finally shuts its doorsÂ
In the less severe, but still rather conservative case that Apple’s free cash flow falls 15% in the year and never grow again, we determine a current value for the stock at $89.72/share. And, if the management without Steve Jobs manages exactly as sucessfully as it did in the last fiscal year and doesn’t grow the Company ever again, the stock ought to fetch $101.67.
It would seem that at current share prices, as long as Apple can maintain itself as a going concern, investors are getting an opportunity to not only buy the Company’s potential growth for free, but also receive a margin of safety in the Company’s operational results in excess of 15%.Â
Is growth even possible without Steve Jobs?Ă‚
Apple has momentum in its personal computer business, an entrenched and dominant market share in personal media players, the top platform in the budding mobile computing business, and ancillary products (AppleTV and iTunes, in particular) which can be leveraged both for growth and tightening its grip on its consumers through interdependence on its products. Furthermore, recent moves by Apple such as the hiring of Mark Papermaster and a slew of chip designers, signals a pipeline of product ideas that is far from running dry.
What investors should worry about
The management team which succeeds Steve Jobs is first and foremost responsible for managing the business. Innovation and vision will come to a patient management team that does not waste money on fruitless “investments” and acquisitions as they may be tempted to do (*cough* yahoo *cough*). There ought to be two priorities:Â
1. Maintain run rate free cash flows similar to those of 2007 and 2008
2. Conserve and build upon cash and short term equivalents
If these two conditions are not met, then shareholders should not give the Company the benefit of the doubt and demand an immediate return of excess cash and short term investments. I believe Apple’s board of directors and current executive team realizes this and is more than capable of continuing executing Apple’s strategy producing high-end personal computing products. And, as such, believe that Apple’s stock is also trading at a potentially attractive discount despite worries over succession.
January 15, 2009
By Dan Hung
www.thecuriousinvestor.com/
Full disclosure: Long shares of AAPL at the time of writing (and considering adding to my position)
The surprise news definitely clouds some of Apple’s longterm revenue visibility (just ask retailers what happens when investors are uneasy about the future), but this doesn’t necessitate a meltdown in share price if the valuation adequately discounts worries about the future.Â
Apple’s share price already implies a near doomsday scenario
Apple currently has $27.54/share of cash and short term investments. Net working capital currently creates $4.38/share of cash. Assuming a wind down of this business would require a working capital reserve of $5/share to pay down the negative net working capital, this leaves approximately $22/share of cash on the balance sheet which can be considered “distributable” to shareholders. Given today’s closing price of $83/share, that would imply that the value of Apple’s future cash flows is just $83 - $22 = $61/share.
From the above table, you can see that Apple’s share price currently implies two highly pessimistic scenarios.
1. Free cash flows will immediately decline 27% from last year and never grow againÂ
2. Free cash flows will fall 5% annually until it finally shuts its doorsÂ
In the less severe, but still rather conservative case that Apple’s free cash flow falls 15% in the year and never grow again, we determine a current value for the stock at $89.72/share. And, if the management without Steve Jobs manages exactly as sucessfully as it did in the last fiscal year and doesn’t grow the Company ever again, the stock ought to fetch $101.67.
It would seem that at current share prices, as long as Apple can maintain itself as a going concern, investors are getting an opportunity to not only buy the Company’s potential growth for free, but also receive a margin of safety in the Company’s operational results in excess of 15%.Â
Is growth even possible without Steve Jobs?Ă‚
Apple has momentum in its personal computer business, an entrenched and dominant market share in personal media players, the top platform in the budding mobile computing business, and ancillary products (AppleTV and iTunes, in particular) which can be leveraged both for growth and tightening its grip on its consumers through interdependence on its products. Furthermore, recent moves by Apple such as the hiring of Mark Papermaster and a slew of chip designers, signals a pipeline of product ideas that is far from running dry.
What investors should worry about
The management team which succeeds Steve Jobs is first and foremost responsible for managing the business. Innovation and vision will come to a patient management team that does not waste money on fruitless “investments” and acquisitions as they may be tempted to do (*cough* yahoo *cough*). There ought to be two priorities:Â
1. Maintain run rate free cash flows similar to those of 2007 and 2008
2. Conserve and build upon cash and short term equivalents
If these two conditions are not met, then shareholders should not give the Company the benefit of the doubt and demand an immediate return of excess cash and short term investments. I believe Apple’s board of directors and current executive team realizes this and is more than capable of continuing executing Apple’s strategy producing high-end personal computing products. And, as such, believe that Apple’s stock is also trading at a potentially attractive discount despite worries over succession.
January 15, 2009
By Dan Hung
www.thecuriousinvestor.com/
Full disclosure: Long shares of AAPL at the time of writing (and considering adding to my position)
