The shares of any company should seem more and more appealing as their price falls, all else being equal. Yet the opposite generally holds. Appleat $700 a share – back in the halcyon days of September – looked unstoppable. Today, at well under $600, it looks suspect.
An imperfect new product or two, a management shake-up, uninspiring margin targets for the upcoming quarter – none of this should matter for a leading company in a growing industry trading at 13 times trailing earnings, and holding $128 a share in net cash. Psychologically, however, the price decline leads inevitably to reflections on what could go wrong.
Fine. Let pessimism be indulged if it must. Suppose that, over the next two years, Apple releases no significant new products and its existing portfolio flags. Keeping it simple, say that unit sales of Macs, iPods, iPhones and iPads are a fifth lower than in fiscal 2012, the year just ended. Throw in a 10 per cent haircut to unit prices, too. Stipulate only a moderate drop in gross margins (consistent with historical performance at lower unit sales levels), and that Apple cannot quickly bring overhead costs down. Earnings per share under this scenario would drop by about half in 2014, to $22 or so.