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What a $14 billion tax bill means for Apple's stock price

apple iphone
As long as Apple keeps selling iPhones, they should come out okay. (Image: Wikimedia Commons)

Europe just sent Apple (AAPL) a $14 billion tax bill.

“The European Commission has concluded that Ireland granted undue tax benefits of up to €13 billion [~$14 billion] to Apple,” European Commission leaders said in a press release. “This is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses. Ireland must now recover the illegal aid.”

It’s unclear exactly what happens next. Will Apple be responsible for the whole amount? Will it pay it in one fell swoop? Will they employ other tax and accounting maneuvers to reduce the amount?

For now, investors want to know what it means for the stock price.

UBS estimates it takes about $3-5 from the share price

“While we expect Apple may record an accrual in the financials relating to this matter, it’s too soon to make any adjustments to our valuation,” UBS’s Steve Milunovich said in a note to clients. “Taking out $14bn of net cash on a DCF has a $3-5 impact on share price.”

“DCF” is short for discounted cash flow, which is a valuation model that analysts use to estimate the intrinsic value of companies. DCF models involve forecasting future profits and cash flows, then discounting them at some rate to determine a present value.

For some context, Apple currently has a market value of about $571 billion. It booked $36.6 billion in profits during the nine months ending in June 2016. A DCF model considers all potential profits Apple will make into perpetuity. So, you begin to get a sense of how $14 billion would turn out to be a minor outflow in the big scheme of things.

Milunovich has a buy rating on the stock and a $115 price target.

Apple shares are trading at around $106, down less than 1% for the day.

Sam Ro is managing editor at Yahoo Finance.
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