If Apple has $44/share in earnings and no contraction and no growth, then present value of perpetuity at 10% discount is $440/share ex cash (44/.10=440). Adding in cash of 150/share we get $590/share (440+150=590).
Plugging the numbers above into a DCF model will result in the same answer. Discounting at a lower rate will result in a higher price/share, and discounting at a higher rate will result in a lower price/share, but discounting at above 10% would be absurd. Why? Try holding every other major corporation to that standard and tell me the result.
Even with a 12 or 13 % discount rate, Apple's valuation is $500/ share. 20% higher than where it presently sits. In fact, one would have to depress earnings to $28/share to equate to present market price, and even still, this would produce a return for an investor of 10% per annum. That is to say, if Apples earnings fell 36% but held steady from that level going forward, then an investor at current $420 price would still enjoy an average return on his/her investment of 10%.
Watch out Supertramp I said basically the same thing a month ago. I even used the 28 dollar earnings per share number and got some vicious responses. I think there were those who thought I was predicting that but, like you, I was just trying to show what is currently being priced into Apple and just how ubsurd that is. Good post
Thanks. I really don't pay it any mind especially here on yahoo message board.
I just sit back and enjoy every day that passes because that's another day that Apple puts money in the bank. Nothing else matters. Doesn't matter if Q2 earnings disappoints, doesn't matter if they sell a million or two million less of this or that because at current price per share all that matters is that at the end of the day they put more money in the bank.
Seems many longs are being conditioned into the earnings game and spending their days hoping to sell out to a greater fool. Seems to me that many shorts and naysayers are letting the tape tell them the value.