[Note: James Berman has investments in Apple (AAPL), both personally, through the Berman Value Folio and through the Fund he manages. James Berman is an investor in Insight Guru Inc., the parent company of Trefis, both personally and through the venture fund he subadvises.]
Among the most overused phrases of the day is: "it's priced in." This rolls off the silver tongue of many commentators without rigor. It becomes the catch-all to dismiss any concern. But to be priced in means to actually be reflected in the price. And you can't know if it's already in the price without a discounted cash flow (DCF) analysis to know what the price should be. Yet, the words are often blithely tossed around without any quantitative backstop--as if you can just guess by putting a wet finger to the market winds.
So let's apply a little rigor to Apple's numbers and see whether the bad news is actually--and fully--priced in.
By looking at an interactive DCF model on Trefis, we can easily modify the inputs. Trefis estimates that Apple is worth $599 based on the following major iPhone assumptions by 2020:
* unit price dropping by 37%
* market share plateauing at 11.4%
* gross margins sliding from 47% to 30%
These are hardly doe-eyed assumptions. Each one reflects waning influence, savage competition and an end to the glory days. I'm not sure I would call them conservative inputs, but they're close.
Many bears have commented on margins, ululating at the thought of Apple's high-margin glossy phones becoming commodified widgets. I agree that margins are in for a rough ride. Instead of guessing at the effect on Apple's worth, though, we can actually compute it. If we take the margins and unit price both down to dire levels, we can see what it does to the DCF value per share. Here's the result of pushing the unit price down by 50% and the margins down to 25%:
And to further punish AAPL for increased competition, we can batter the iPhone's market share down to nearly 7% to reflect a Blackberry-like erosion in popularity:
We end up with an intrinsic value per share of $476 just above the market price. You could argue that if AAPL has trouble with the iPhone segment, they'll suffer across all business lines, including the iPad and Mac. True enough. Due to their lesser contributions to AAPL's value, however, diminutions in margins and market share there don't move the needle much.
Bottom line: even if we draw and quarter the iPhone franchise across every major metric, Apple is still worth more than the market price.
Now that's what I'd call "priced in."
[This article is intended to provide general information and should not be considered legal, tax or financial advice. All investment involves risk of loss. No one should invest in any financial security without reading the full prospectus and seeking professional, personalized advice, if required.]
