Could Apple Possibly Be Worth Just $240?

So far this week, Apple (NASDAQ: AAPL  ) has been under pressure and lagged the broader market. One contributing factor to the weakness has been David Trainer of New Constructs, who has made headlines over the past couple of days by proclaiming that Apple is worth just $240. That's over $200 less than what shares closed at yesterday, implying an additional 45% downside.

Could such a price be possible?

The one and only
Trainer's bearish thesis hinges upon a single metric: return on invested capital, or ROIC. Apple has historically enjoyed an incredibly high ROIC that has declined recently and Trainer thinks that trend is here to stay, citing the loss of Steve Jobs and assumption that the company has no revolutionary products up its sleeve.

He compares Apple's ROIC to industry peers and arrives at different price targets based on different levels of ROIC. At a 75% ROIC, which is slightly above Microsoft (NASDAQ: MSFT  ) , Apple is worth just $295, in Trainer's view. He expects Apple's ROIC to decline to 50% eventually, which pegs the company at $240. According to his estimates, Apple's current price implies a 124% ROIC, which Trainer considers unsustainable.

Trainer was interviewed on Money Life and CNBC discussing his model, and also posted a detailed breakdown (link opens PDF) on his blog.

Party like it's 2009
Apple now has over $154 per share in net cash just sitting on the books, which implies that Trainer values the rest of the business at just $86. His estimates would put Apple's market cap at $225 billion, and its enterprise value at just $80 billion. In comparison, Microsoft's current market cap is $281 billion, and the software giant has an enterprise value of $220 billion.

However, any valuation of any stock that relies entirely on one single metric is inherently flawed and incomplete. Investors should utilize a wide range of quantitative metrics -- combined with qualitative assessments of the fundamental business -- to formulate an overall view.

Digging deeper into Trainer's model (linked above), he's effectively assuming that Apple's net operating profit after tax, or NOPAT, will suddenly plunge to fiscal 2009 levels of around $8 billion, which is what would happen if you abruptly slash its ROIC to 52%. For comparison, I estimate Apple's NOPAT last quarter alone at $9.3 billion, with $38.7 billion over the past 12 months. This is how his estimate compares to Apple's actual figures.

Source: SEC filings and author's calculations. Fiscal quarters shown. TTM = trailing-12-months.

Trainer broadly proclaims that Apple is "destined to be just another consumer electronics company," which somehow implies that Apple's business will implode overnight. His estimates effectively ignore the iPad altogether, which was released after 2009 and remains young. Trainer also assumes that Apple will become free cash flow negative to the tune of $3.6 billion, compared to the $44 billion in positive free cash flow that Apple's generated over the past four quarters.

To be fair, if Apple's fundamentals did self-destruct at the tweaking of a spreadsheet cell, then a $240 price target could be warranted. In reality, companies don't tend to see operating profits plunge by 80% at the drop of a hat, and investors would gradually observe any potential deterioration as it occurs over many quarters.

By the same rationale, I can apply some tweaks of my own, except I'll play bull to Trainer's bear. By my estimates, if Apple were to sell a bazillion iPhones tomorrow, it would be worth a millionty dollars per share today. 

The good news is that Apple's business doesn't rely on Trainer's spreadsheet.

There's a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (29) | Recommend This Article (45)

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  • Report this Comment On May 16, 2013, at 7:16 AM, DanManners wrote:

    First, Apple stock one way and that is down. This dead cat bounce that we just had (according to Cramer) is over and going down fast. The big dividend and buybacks will end up doing nothing for the stock except push the p/e lower still.

    Apple has not had one bit of news except for more memory on the high end ipad and the buybacks in 8 months. We are facing another terrible earnings report this July for this qtr and maybe another one for the Sept 13 qtr.

    A mildly upgrade iphone 5s and a slightly improved ipad will not generate the sales needed to keep margins high and sales growing. Apple will indeed trade below 400 soon and keep going lower into earnings. When they release the new phone problems will appear again like the maps problem did before. The iPhone 5 came out and except for a brief rally, the stock started to dive. What we thought would lift the stock destroyed the stock.

    So I now look at product releases as negatives and Apple has much more suffering ahead before the stock bottoms below $ 200. Tim Cook is not Steve Jobs and will not be able to innovate like he did.

    Expect China sales to start falling as competition keeps growing and Apples products are too expensive.

  • Report this Comment On May 16, 2013, at 9:26 AM, TMFTwoCoins wrote:

    "By my estimates, if Apple were to sell a bazillion iPhones tomorrow, it would be worth a millionty dollars per share today."

    Perfect way to kick off my morning. Great write, Evan.

    Daniel

  • Report this Comment On May 16, 2013, at 10:00 AM, NewConstructs wrote:

    Mr. Niu,

    Thank you for writing an article about my article - always a compliment.

    Allow me to correct a few mistakes in your analysis.

    The free cash flow numbers in my model are inconsequential to my analysis, in this case. The perpetuity calculation that underpins the valuation of AAPL assumes that NOPAT equals Free Cash Flow. Past free cash flows are not relevant to my valuation b/c, as you know, the value of an asset equals the present value of future cash flows.

    To better understand the calculations behind the finance of my analysis, pls read this definition of Economic Book Value: http://blog.newconstructs.com/2012/06/18/price-to-economic-b...

    Also, to appreciate why reported accounting results are not reliable, pls read this article on how to assess quality of earnings: http://blog.newconstructs.com/2010/08/05/economic-versus-acc...

    Thank you,

    David

  • Report this Comment On May 16, 2013, at 10:13 AM, NewConstructs wrote:

    Lastly, my analysis is VERY different from reported values as accounting metrics, esp those provided by Yahoo, are not reliable.

    Accounting rules were not designed for equity analysis, there are numerous finance texts that prove this point.

    Wiley's The Valuation Handbook dedicates an entire chapter to "Modern Tools for Valuation", which explains why investors need to analyze footnotes to reported financials to perform proper diligence on a firm's earnings. Here is a link to the book: http://bit.ly/101DwfV

    I also wrote a detailed explanation of why accounting earnings are not reliable in which I reference several other books on the same topic: http://bit.ly/xzRJkn

    Note that all of my calculations are 100% transparent. I show all of the formulas and calculations needed to replicate my analysis.

    I do that b/c the dialogue should not be about whose math is better but about what AAPL's long-term future prospects truly are.

    Of course, people will try to poke holes in my financial analysis, but that appears to be an attempt to divert this dialogue away from the real issue stated above: Apple's future.

  • Report this Comment On May 16, 2013, at 4:29 PM, TMFNewCow wrote:

    David,

    Thanks for the respectful comments and elaboration, even though we disagree. I guess the main flaw I have in your analysis, which as you mentioned is entirely transparent and provided (very useful for a debate), is how quickly you believe the ROIC will plunge.

    I agree that Apple's ROIC has been remarkably high for the past several years, but I don't believe it's realistic to forecast that NOPAT will drop to $8 billion in the near-term.

    I will also agree that if Apple's business were to deteriorate, perhaps due to a lack of innovative/revolutionary products, then this could happen. However, this would take *years* to occur if at all, much like it took years to climb that high in the first place. In the meantime, investors would see many signs of deterioration, such as falling iPhone/iPad sales, further margin contraction, etc.

    So assigning a $240 current valuation seems to be jumping the gun on an outcome that's a remote possibility in the distant future. Apple's NOPAT won't decline from $38+ B to $8 B so quickly and arbitrarily.

    Foolishly,

    -- Evan

  • Report this Comment On May 16, 2013, at 6:05 PM, tkell31 wrote:

    Hey, he's another clown like the 1111 price target guy. Well, it worked, some otherwise obscure individual gets his name out there, gets on cnbc, and is getting his 15 minutes of fame.

    Or as my 8th grade English teacher used to say, only dim people use the word very, and only really dim people feel the need to CAPITALIZE it to make the point. Is it different? No it's "VERY" different.

    Hey, could Apple's growth contract? Of course, but are people going to stop buying the product by the millions tomorrow? Of course not. Lets see what the fall has to offer before we all sell Apple short.

  • Report this Comment On May 16, 2013, at 6:14 PM, eissturm wrote:

    I personally love all the investor panic about Apple. The more and more they deflate the company, the more shares I can buy.

    Apple is on a downswing right now, but that's to be expected. There is no company that delivers a product like Apple's in their sectors, and people tend to forget that. Apple IS the tablet/smartphone market, and while others have gained market share, nobody has the kind of grip on the consumer's imagination Apple has.

    The lack of new product launches is good. Apple's strong suit has always been launching a single, premium quality product in each of their sectors each year. They aren't about trying to offer as many skus as possible, they are about standing apart from the rest of the industry. It's the difference between a smartphone and an iPhone, between a PC and a Mac, an mp3 player and an iPod.

    Lack of innovation? Revolutionary products? That's not even Apple's game. They refine, they do not revolutionize. Tablets existed seven years before the iPad, smartphones had been around for eons before the iPhone launched in 2007, all Apple did was to refine those concepts into something Grandma and Grandpa can use.

  • Report this Comment On May 16, 2013, at 6:15 PM, ryanalexanderson wrote:

    > Or as my 8th grade English teacher used to say, only dim people use the word very, and only really dim people feel the need to CAPITALIZE it to make the point.

    I think such generalizations are VERY dim. This 8th grade teacher would do better to teach the poor taste of ad hominem attacks.

  • Report this Comment On May 16, 2013, at 6:30 PM, ryanalexanderson wrote:

    ...but okay, I am grudgingly willing to accept that the effectiveness of capitalization has its limits.

  • Report this Comment On May 16, 2013, at 6:36 PM, mrpraxis wrote:

    It's always been difficult for me to separate the lefty politics of Matt Damon from the first rate quality of his acting. I REALLY want to like Matt's movies more.... So long as the cult of Apple continues to be populated by cult-like consumers then those consumers will put up with LOOONG market cycles and barely iteratively evolutionary improvements. I am not going to lie I am a confirmed Apple-hater [and partly love to see them fail]: Apple screwed me long ago when I had an Apple II GS and Apple said goodbye to an upgrade path to the Macintosh. Apple's ticker cycle seems more closely associated with a cult - it ebbs and flows according to the how drawn its cult members are to it. I only have a freakin' iPod because my Audi won't connect to my far-superior-in-every-way-Microsoft-Zune.

  • Report this Comment On May 16, 2013, at 6:51 PM, tfmeehan wrote:

    First off my guess is that Mr. Trainor has some money he'd like to invest in Apple and is hoping that his analysis will drop the price so he can get in lower.

    Secondly, I think that Jobs was a genius at recognizing good ideas and suggesting broad refinements but if anyone believes that he was sitting there coming up with every idea in Apple's R&D group doesn't understand how that process works.

    And finally, Apple has never had less than a 3 year gap between redefining markets so this hand-wringing over their lack of new products is indicative of a flaw in the perceptiveness in the commenter not in the current climate at Apple.

  • Report this Comment On May 16, 2013, at 6:57 PM, tfmeehan wrote:

    As to the gentleman who bills himself as a "confirmed Apple-hater", what makes you think the rest of your comment retains any credibility after that?

  • Report this Comment On May 16, 2013, at 8:09 PM, Davidovich wrote:

    The flaws in this argument are varied and many, but the greatest irony is that it's coming out just weeks before Apple's annual developer conference, which is now the one and only place Apple uses to make big announcements (other than one-off events). The notion that Apple has run out of ideas since Steve Jobs died is perhaps the greatest mistake, since Apple likely had 10 years of products planned and in design when Steve passed away. And don't forget, he was battling terminal cancer the last 8 years of his life -- Steve was not designing or creating products like the iPod, iPhone and iPad, he was managing the company which included the teams that were creating those projects. Many of those creative peoplea are still at Apple. I don't know what the future holds, but I suspect after mid-June, Apple's future will look very different -- and perhaps a lot brighter.

  • Report this Comment On May 16, 2013, at 9:05 PM, OracleofOmahaha wrote:

    Listening to Trainer reminds me of the book When Genius Failed and LTCM. These guys were a lot smarter than Trainer could ever hope to be. LTCM had Ph.Ds and a Nobel Laureate who were so arrogant about the mathematical certainties of their models that they never saw the catastrophic losses coming that ruined their hedge fund. All of these models, formulas and mathematical calculations have been proven over time to be worthless in trying to forecast the economics of the market and specific companies. But Trainer thinks his model is different. Trainer is nothing new or special, just another financial advisor with a can't fail model trying to make a name for himself in a long line of advisors with failed models. Hope that Trainer does not run and hide or make any excuses for why his model failed.

  • Report this Comment On May 16, 2013, at 10:23 PM, durango58 wrote:

    Everyone is overanalyzing this equity. Buy it on dips and sell on "Irrational Exuberance."

  • Report this Comment On May 16, 2013, at 10:29 PM, captam wrote:

    I agree. Apple has only one way to go. Just look at their expensive marketing costs in Hong Kong and China. They should never have set up their own retail operation.

    They have a massive retail shop at IFC in Hong Kong's CBD with the rents there, among the most expensive in the world. Passed by there yesterday mid-afternoon and the shop looked like an airport terminal two hours after the last daily flight departure before closing for the night.

  • Report this Comment On May 16, 2013, at 10:32 PM, eldetorre wrote:

    Apple "innovative/revolutionary products" NO.

    Apple IS not an innovative or revolutionary company. They are simply slightly earlier adopters of others innovations. They only market themselves as such, patents for curved corners aside.

    Apple is a good company making good products. Unfortunately for would be shareholders this does not mean anything, because the speculative upswing is not there, nor does Apple return value to shareholders. Why buy a stock if you can't make money from it regardless of how well it makes money for itself?

  • Report this Comment On May 16, 2013, at 10:53 PM, skirun100 wrote:

    Thanks for the detailed analysis. My question is, who let this guy on CNBC? Unless I am missing something here, he totally doesn't understand the tech sector and compares Apple with a Consumer Electronics Company? What is the IP Value of IOS?

    Also the Mac OS, whatever its currently called?

    I am tired of reading benal comments on Apple from analysts who know nothing about technology. Apple is a software company, a hardware company, and yes a consumer electronics company, and a services company? Am I stupid or insane?

  • Report this Comment On May 16, 2013, at 11:38 PM, KongPL wrote:

    went with my time from china to an offsite in hong kong. half of the support staff - paid maybe USD2500 per month - went to the Apple store in IFC to buy lots of products, despite having to line up for hours. the apple stores in beijing overflow with people - both browsing and buying. black market/parallel imports are booming. apple has just started to tap the China market......

  • Report this Comment On May 17, 2013, at 8:01 AM, mikecart1 wrote:

    "The good news is that Apple's business doesn't rely on Trainer's spreadsheet. "

    Or that any stock relies on anyone's spreadsheets or model. The problem with investors and the market is that people fail to realize or admit that that market isn't driven by any indicators, metrics, or numbers. It is driven by one classic idea: hope. If more people hope for a stock to go up than down someday, interest rises with that stock. Vice versa. It is as simple as that.... or is it? :)

  • Report this Comment On May 17, 2013, at 9:00 AM, digndig wrote:

    Apple $600 in 24 months. Doubters being shaken out now. $25-40 billion/yr profit all good. 15x earnings=solid company. Can't simply replace a visionary marketer workaholic like Jobs, Apple is too big to respond corporately to vision the way it could when smaller. But excellent teams will produce excellent future products, maybe some pioneered overseas. Market gets saturated with new products quickly.Don't want/need a yearly new products. Look at US auto makers who ran themselves into the ground with yearly models. I want solid products that continue to perform. DO I need to turn on my house lights from work or just nice to have. My $8 timer does it well.

    Apple-Stay solid. (and I don't own their products, too expensive for me but i Iike their design efforts and product cycles)

  • Report this Comment On May 17, 2013, at 10:03 AM, ValueInvestor747 wrote:

    Thank you SO much for writing this Evan and exposing this guys deception. I've been all over his articles' message boards proving how nonsensical this exercise is.

    Like you pointed out, he is arbitrarily picking a ROIC (using competitors) and forcing that into his model. Not once does he make an effort to predict when and how AAPL's ROIC will reach that level. The proper way to conduct this analysis would be to evaluate NOPAT and Invested Capital and then from those projections, derive an ROIC. Mr. Trainer, however, has picked his target ROIC (which conveniently yields an absurdly low valuation) and then forces that square peg into a circular hole which yields an NOPAT that is 20% of AAPL's current NOPAT!!!

    Also please note that using his own model and APPL's current NOPAT and Invested Capital, AAPL is valued at nearly $800. He conveniently leaves this out of all of his talking points. This "analysis" is equivalent to if I were to pick a stock, say IBM, take the current price (~$206), project that the P/E in a few years will settle down to say 10, then from those two figures, state that the EPS will be $20. The simple fact that Mr. Trainer is on all of the message boards defending his model so adamantly makes me believe deep down, he is skeptical at best. I see an ulterior motive here.

  • Report this Comment On May 17, 2013, at 11:10 AM, ValueInvestor747 wrote:

    Also, one more thing: All of this talk about Apple's lack of innovation is starting to make my skin crawl. I knew the American public has a very short attention span, but this is absurd. Facts:

    Apple invented the iPod and iTunes, which revolutionized the entire multi-billion $ music industry in 2001. Six years later, in 2007, they released the iPhone, which again completely disrupted and reinvented a massive industry (mobile phones). Three years later they essentially created their own multi-billion $ industry with the release of the iPad. All the while they drastically improved each previously released product (compare the current iPod to the original, the current iPhone 5 to the 1st generation, and the iPad mini to the iPad 1).

    Note that each product took at least 3 years (and the iPad must be viewed differently as it was essentially a modified iPhone). So now, 3 years after the most recent revolutionary product, people have concluded that Apple is dead, unimaginative, not innovative, etc.??? Apple has always held itself to the highest standard and produced the highest quality products. They cannot churn out quality revolutionary products every year, no company can.

    Lastly, don't forget that Apple's competitors, namely Samsung, are nothing more than patent infringing thieves. Don't take my word, take the courts'. You can have it one of two ways: you can be patient and purchase the highest quality products from a true innovator. Or you can rush to judgement and write off Apple as dead and buy a cheap knock off from a Korean competitor who wouldn't even be in existence if it weren't for Apples' ideas...that it can openly steal.

  • Report this Comment On May 17, 2013, at 1:07 PM, Darwood11 wrote:

    Interesting article, and good response by Evan.

    I've found it increasingly difficult to read any investment commentary about APPL.

    Some of the arguments are reminiscent of the arguments in favor of real estate in 2008.

    As for the arguments in favor of buying AAPL today, "on the cheap." I caution that buying on the way down is a good strategy with index funds and a long term perspective. Eventually the S&P 500 will recover. It did after 2008. After all, buying VFINX is buying into a large segment of the economy.

    However, buying individual companies is somewhat more problematic.

  • Report this Comment On May 17, 2013, at 4:31 PM, TMFSymington wrote:

    "By my estimates, if Apple were to sell a bazillion iPhones tomorrow, it would be worth a millionty dollars per share today."

    Just made me laugh out loud, Evan. Good stuff. :-)

    Steve

  • Report this Comment On May 18, 2013, at 5:38 PM, kthor wrote:

    one bad earning report could possibly do that ... then it's time to buy (hoping) lol

  • Report this Comment On September 25, 2013, at 2:52 PM, NewConstructs wrote:

    People tend to underestimate how quickly a very popular stock can fall out of favor once its products lose their luster...think Blackberry and Dell. Both those firms once had high flying stocks and returns on invested capital - but once they lost their innovative edge, they crashed quickly.

  • Report this Comment On September 25, 2013, at 3:10 PM, Mathman6577 wrote:

    I advise all analysts, bloggers, writers etc. to read the book "Insanely Simple" by Ken Segal. It provides great insight into the company, how it operates, and why it makes great products.

    Disparaging a company that provides great products and makes a ton of money ($55B is nothing to sneeze at) is generally not good form.

    I would advise the analyst to focus on companies that consistently lose money, don't yet make money (but are treated like gods because of the premise that they have a great CEO who can't do anything wrong), or rely on government bailouts to survive.

    And I keep asking the question why is the Motley Fool, which I thought stood for a long-term approach to investing, writing (even if they disagree with it) about very short-term analysis and that focus on arcane numbers (ROIC can be considered that)?

  • Report this Comment On September 25, 2013, at 3:27 PM, Mathman6577 wrote:

    ValueInvestor747 hit it right on the head.

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