Apple 2.0

Covering the business that Steve Jobs built

Why Charlie Wolf lowered his Apple price target to $710

February 25, 2013: 12:43 PM ET

The difference between Wolf and Wall Street may be that he values Apple's cash holdings

Data: Needham. Chart: PED. Click to enlarge.

Data: Needham. Chart: PED. Click to enlarge.

FORTUNE -- There's something about Charlie Wolf's approach to Apple (AAPL) that I find charmingly old school -- perhaps because he's been in the business even longerĀ (14 years at First Boston and 15 at Needham & Co.) than I have.

Most analysts seem to change their mind about Apple's prospects every time the wind shifts; Baird Equity's William Power, for example, has issued seven different Apple price targets in the past 12 months.

Wolf, by contrast, recalibrates his targets on a strict biannual schedule -- once in February and again in August. And he tells you with some precision how he arrives at those targets, breaking down Apple's line items -- Trefis style -- by their contribution to what he thinks the company ought to be worth.

In his most recent reevaluation -- issued Monday -- Wolf lowered his 12-month Apple price target to $710 from $750.

That puts him an even $100 a share over the Street's median target (as reported by Thomson/First Call) -- primarily, as near as I can tell, because he puts a value on Apple's excess cash of $142.48 a share. According to Greenlight Capital's David Einhorn, the market values the company's $137 billion cash stockpile at less than zero.

The highlights of Wolf's latest report: (I quote)

  • On the positive side, the growth in excess cash over the past six months added $18.70 or 15.1% to Apple's valuation.
  • A newly minted line item — iTunes, software and services — contributed $83.48 or 11.7% to Apple's valuation chiefly because of the outsized gross margins Apple earns on its software.
  • On the down side, the value of the iPad fell $11.83 or 10.8% to $98.11 chiefly because of the introduction of the iPad mini, which has a much lower gross margin that the full-sized iPad.
  • The value of the iPhone fell $14.56 or 4.5% to $308.64 because of our assumption that the iPhone's worldwide share would stabilize at 20% rather than 22% as before.
  • The largest decline occurred in the Mac, whose value fell from $100.50 to $57.42, a 42.9% decline, in belated recognition that neither Mac nor Windows sales would continue to rise at past rates because of the onslaught of the iPad and other tablets.

"The lingering risk in the Apple story," he concludes, "is that the company may no longer innovate at the same pace and with the same disruption that characterized the era when Steve Jobs was at the helm. With respect to our valuation model, any deterioration in the iPhone's market share or gross margin would have an outsized impact on our price target."

Below: Wolf's current valuation spreadsheet. The NAs reflect line items that Apple rejigged in January.

Screen Shot 2013-02-25 at 12.12.07 PM

Click to enlarge.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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