Samsung got some bad news today (maybe? assuming Digitimes is correct). Samsung’s stock fell just over 6% losing approximately $10 billion in market capitalization on the rumor that Apple may be switching some of its DRAM purchases to another company. Using the present value of an annuity formula we can extract the implied views of the stock market. We will assum no growth and that Samsung’s net income is equivalent to the free cash flow available to shareholders.
Present Value of an Annuity = (Cash flow) / (required rate of return)
This allows for a rough and dirty look at the math behind the fall in price. We will also assume that the required rate of return for investors on Samsung is 12%, although this may be a little low.
$10 billion = C/(12%) solving for C gives C = $1.2 billion
So, given the drop in market value today, investors must believe that there is risk of losing $1.2 billion of Samsung’s annual profit. To put that in perspective, in 2011 Samsung Electronics Co Earned $11.3 billion.
Apple is possibly Samsung’s biggest client. Could Apple be preparing to move completely away from Samsung as a supplier as punishment for their ongoing court battles? I don’t know, but I wouldn’t put it past them. In any case, investors are worried about Samsung’s profit.