$AAPL and Icahn

I think Apple is worth about $200/share. Carl Icahn, the famous activist investor and Apple’s largest individual shareholder (like $5bn of his own money) thinks the firm is worth $240/share. At the current price of $115, it sure looks like a good investment — do you think you will still be buying an iPhone 10 years from now?

The difference in our assumptions: Icahn thinks revenue will grow over 20% per year for the next 3 years on the back of new products (TVs and cars) in addition to iPhones. I estimate growth at 10% per year for 5 years, considering only the growth in phones (Apples share is still small and everyone still doesn’t have a phone — it’s a huge global market, better than cars and TVs). Note that this past holiday season, where the iPhone 6 launched, Apple grew revenue 33%.

Take a look at the model — Orange cells are the critical assumptions!

Update 1/19/16 — Fair Value: $150/shr

AAPL continues to trade at a low multiple of earnings relative to the average S&P firm. Why? It’s likely to be uncertainty about the stability of revenue. What’s to say they keep selling phones 10 years from now, and why will they retain the premium pricing? One must tell a narrative of competitive advantage involving switching costs. The reason your next 5 phones will be iPhones and not a Chinese Android is because you pay a high price to switch off the AAPL platform. At a time, it may have been purchased iTunes media that kept users locked-in. Maybe it was the developer ecosystem, in which the best apps always debuted on iOS first. Today it is likely the product differentiation — Apple devices are the “safest” and easiest to use. But Apple doesn’t have a monopoly on simplicity. It can be copied, so this is a weak barrier to competition. I adjust the valuation to reflect higher future competition by reducing terminal earnings growth and margins slightly (Apple still earns higher margins than average due to in-house chip design).

Further concern arises over speculation that your next phone won’t be a phone at all, but rather an new and unknown communication technology (the Blackberry to smartphone transition). The high discount rate accounts for the risk of massive technological displacement and we need not concern ourselves with predicting revolutions.

*Note: At the current $100/shr market value, stock repurchases should at material value with 1.5/1 bang for your buck.