Back in 2011, Aswath Damodaran, who is Professor or Finance at the Stern School of Business NYU and a globally renowned valuation expert, commenced an intrinsic valuation of Apple Inc. (NASDAQ:AAPL).

His valuation thesis moved in step with the company’s quarterly earnings reports, but reflected his central view (his ‘narrative’) that Apple Inc. (NASDAQ:AAPL) was positioned, in terms of a company life cycle, as a mature business. It therefore suffered from the twin weaknesses of a plateauing growth curve (revenues growing less than 5%) as well as shrinking margins due to increased competition.

Price versus value

Except for a period in mid-2013, when the stock severely underperformed, his narrative was fairly efficient in tracking the market as is borne out from the chart below which tracks his intrinsic valuations alongside market pricing. Note how the gap has closed in the latest valuation.

Apple value-vs-mkt-price

According to Prof Damodaran, Apple Inc. (NASDAQ:AAPL)’s revenue derives directly from its market share of smart phones and tablets, while its impressive profitability is accounted by its enviable margins in the smartphone business. This fact is only now being recognized by the market, which has had to contend with a number of disappointments when another path-breaking product (in the vein of the trifecta of the iPod, the iPhone and the iPad) failed to be introduced.

Now, therefore, “investor expectations have moderated and the company is being measured for what it really is: an extraordinarily profitable company, with the most valuable franchise in the world.”

Latest valuation and strategy

After Apple’s Q2 report, Prof Damodaran’s valuation is $ 96.55, and reflects that the smartphone is a stable line so far, the tablet market is shrinking and the Mac computer business is a “rump” business.

Prof Damodaran will consider exiting his investment in Apple if the stock price moves above $ 100.

Failing that, he would like to hold on to the stock for its dividend stream and the outside hope of another ‘disruption’ (read: blockbuster product).

So, it’s either a “Hold” or a “Sell” depending on whether the price is north of $ 100 or not.

Apple’s product line-up

As usual, the market is abuzz with speculation on what Apple could announce in September, usually the time when the company holds its much awaited launch conference. Here are some products/developments that are being talked about:

  • a wearable device such as an iWatch
  • the iPhone 6 in two larger screen avatars (4.7 inch and 5.5 inch)
  • an iPad juiced up for corporate use
  • iOS 8
  • OS X Yosemite
  • in conjunction with IBM, the much vaunted Swift programming language

It is difficult to say if any of these have the disruptive power to move Apple’s price beyond $ 100. There could be the risk that these are already baked into the price, because going by past experience, the stock price moves up leading into the launch, and corrects a couple of months after.

Looming risks

One of the tables in Prof Damodaran’s post shows that Apple’s share of the global tablet market has nearly halved from the 60.3% in July 2012 to 32.5% in April 2014, a period of just two years, due to intensifying competition as well as, supposedly, the iPad’s own superb build quality.

On the other hand its global smartphone share has remained virtually stagnant at 16.6% in July 2012 and 15.2% in April 2014. Xiaomi, a smartphone upstart manufacturer in China is said to be selling its smartphones at half Apple’s price, and is already the second ranked smartphone seller in China in terms of dollar sales. Samsung Electronics Co. Ltd. (LON:BC94) (KRX:0059935) is in first place, while Apple is third.

In such a situation, a disappointment on new product announcements could trigger a substantial sell-off.

Technical situation

Apple stock-chart-weekly

In the weekly chart of Apple Inc.(NASDAQ:AAPL) above the stock, at $ 95.99, is critically poised at the upper end of the rising channel in which it has traded since April 2013. It is within handshaking distance of the psychological resistance level of $ 100 and a whisker shy of its September 2012 high of $ 96.21. It is already overbought on the RSI and has been so for the last three months. A correction could take the stock down to the lower channel line and near about the $ 85 level.

The technical situation calls for caution on the part of investors, particularly when the stock is fully valued.

It is not known whether Prof Damodaran has a stop-loss price in mind on the downside.