There is a lot of angst and speculation on how low
Lets play “bad” scenario
Lets make the following assumptions for fiscal 2016:
- Cut the Street’s fiscal 2016 revenue projection of $236 billion by 5% down to $224 billion
- Drop gross margins from last years 40.1% to 37.5%
- Use the same $22 billion in operating expenses spent in fiscal 2015
- Assume $1.5 billion in other income
- Keep the tax rate at 26.2%
- Keep the share count flat at 5.683 billion shares
- You get EPS of $8.25
Assuming a PE multiple of 10x and no benefit from its current $17 in net cash per share the share price would be $82.50. Down from its current $97 which would be painful but not a free fall.
Lets play “really bad” scenario
Lets make the following assumptions for fiscal 2016:
- Cut the Street’s fiscal 2016 revenue projection of $236 billion by 10% down to $212 billion
- Drop gross margins from last years 40.1% to 35%
- Use the same $22 billion in operating expenses spent in fiscal 2015
- Assume $1.5 billion in other income
- Keep the tax rate at 26.2%
- Keep the share count flat at 5.683 billion shares
- You get EPS of $7
Depending on what PE multiple you apply (a case can be built for a very low one due to deteriorating conditions but lets use 9x and no benefit from the cash it has or builds up) the share price would be $63.
At this point in time Apple should have over $20 in net cash after paying any additional taxes to bring back overseas cash so it would have over 30% of its market cap in cash.
Note that there are some analysis that compares Apple’s potential PE multiple to HP (see USA Today article). Its not totally clear which HP these analysis are using or if they have adjusted for the company splitting into HPE (Enterprise) or HPQ (PCs and Printers) since they tend to use a PE multiple of just over 4x.
On a post-split basis HPE’s PE multiple on its fiscal 2016 (October) earnings is 6.5x and HPQ’s is 6.1x. when you use the analysts estimates. On
I would also make the point that in many ways Apple is a very different company than HPE and HPQ. Compared to HP Enterprises they are in very different markets (consumer vs. enterprise) and for HPQ HP is much more exposed to the declining PC and printer markets. While it makes for an “easy” comparison since all three are very hardware oriented once you peel the onion the compares fall apart.
Lets play “worst case” scenario for Apple
Lets make it even worse in fiscal 2017:
- Cut the fiscal 2016 $212 billion revenue projection by 5% down to $202 billion
- Drop gross margins down to 30%
- Decrease operating expenses down to $20 billion
- Assume $1.5 billion in other income
- Keep the tax rate at 26.2%
- Keep the share count flat at 5.683 billion shares
- You get EPS of $5.50
So if you use a PE multiple of 8x (another notch down from 9x) and again give the company no credit for any of its over $20 in net cash the share price would be $44 which would make its cash 45% of its market cap. At that point the company would only have an Enterprise Value (market cap minus net cash) of $136 billion. While it would be a huge undertaking I would not be surprised to see dealmakers come forward to take it private which of course would drive up the share price.
All of these scenarios are significantly below Apple’s current $97 share price. But I do believe they show how many aspects of the business would need to go wrong for the share price to drop significantly from its current price and can be compared to Bull vs. Bear cases.
