Interesting comment on Apple as upside depends on "hardware hits"...and that won't happened...soon...so still -ve on Appl
Apple Inc. - DCF Scenario Analysis Suggests Limited Downside with Significant Upside
Requiring Hardware Hits
Apple expert Horace Dediu recent told us, "As Apple is priced today, it’s assuming the ecosystem will
erode because we cannot justify the 800mn users paying $300 a year continuing in perpetuity. The
current price assumes either the $300 goes to $30 or the number of users goes from 800mn to 200mn
in a few years." To test this, we ran a DCF model on six Apple scenarios, from very bearish to quite
bullish. We found significant downside only in a BlackBerry situation in which iPhone units fall
precipitously. The stock appears about fairly valued on weak future iPhone sales. However, if new
products are 25-50% as successful as the iPhone, a high bar, we estimate there is upside to $130-160.
Limited downside barring an iPhone meltdown
Investors currently seem to be pricing in flat to down iPhone sales and moderate support from services
revenue, which appears reasonable over the near term. Our most bearish case is a Blackberry-like fall
from grace, putting the stock around $70. If iPhone goes the way of the PC at 5-10% annual declines,
the stock could be worth about today's price. Given the size of the iPhone and historical difficulty in
maintaining hardware margins, this is a reasonable possibility though probably too negative.
Upside potential mostly depends on substantial hardware hits
Significant upside requires either outstanding services growth, which we think ultimately depends on
hardware, or new product hits. Scenario 4 assumes new hardware product(s) with success equal to
about 25% of iPhone revenue, resulting in a stock price of $130-150. Scenario 5 assumes products
equal to 50% of iPhone revenue, likely reflecting a big win in virtual reality, which could take the stock
to $140-165. Scenario 6 is scenario 4 plus a successful Apple Car, which could support $170-195 per
share.
Valuation: Stock range bound near-term; keeping target of $115
The stock likely is range bound for now with low multiples acting as downside support and lack of
demand catalysts an upper ceiling. If estimates continue to decline, it will be hard for the stock to muster
more than a bounce for now. Increasingly F18 looks like the catalyst for more substantial appreciation.
Our target of $115 is 13x F17e EPS.