So far this week, Apple Inc. (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 Inc. ( NASDAQ:AAPL)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 Inc. (NASDAQ:AAPL) 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 Inc. (NASDAQ:AAPL)’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 Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL) is worth just $295, in Trainer’s view. He expects Apple Inc. (NASDAQ:AAPL)’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.
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 Corporation (NASDAQ:MSFT)’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.