A little over a year ago, I made the claim that Apple was not worth $460.
I made 4 key points.
- Downside protection: balance sheet protects the business from going bankrupt. If I can find a net net with a dying business with AAPL’s balance sheet metrics, I would be all over it. So why wouldn’t I buy AAPL?
- Better than the S&P: A bet that AAPL will perform better than the market over a couple of years.
- Better than cash: I started the year with about 50% in cash. Cash makes up 1/3 of AAPL’s market cap. In other words, if AAPL was a hedge fund, I transferred my US dollars into AAPL dollars for AAPL to manage. With their management, pricing power and business strength, they are able to invest money in ways I cannot dream of.
- Priced for doom: Current valuations predict AAPL has zero growth remaining.
Most of them still hold true.
The 4 Key Points Today
Downside Protection:The balance sheet is still as strong as ever with $159B cash on hand. This provides easy downside protection and allows Apple to withstand any short term business problems. Cash also lets them test out new products, ideas and concepts.
Better than the S&P: It’s been underperforming the S&P but I’m still confident it will do better.
Better Than Cash: Investors keep shouting for AAPL to return its cash, buyback stock or do something smart with it to earn higher rates of return. On a personal level, instead of holding cash and not doing anything with it, I’d rather put it into Apple.
Priced for Doom: The current stock expectation still has not changed from 1 year ago. Still currently priced for zero growth.
My Only Edge with Apple
When it comes to large caps, you don’t have any edge other than knowing when to buy.
The only time you can actually come out ahead of Wall Street is by playing the waiting game to buy at the best valuation possible.
But stock valuation is a subjective exercise.
For example, Facebook agreed to buy What’s App, a mobile messaging service, for $19B. The acquisition may be shrewd in terms
- staying innovative
- growing user base
- increasing engagement and
- calculating based on per user value
but valuation is a different story.
Facebook can print its own money so it can afford to win or lose off the $19b. However, as a small investor, you and I don’t have that luxury.
If valuation black belt Prof Damodaran is troubled by the valuation, then I don’t see anyone else capable of putting out a better analysis of the deal.
Apple is Still NOT Worth $530
Now that you know my stance on Apple, I won’t be talking about the iPhone 6, the upgrades by some analysts, the useless speculation over 4K screens etc.
Most of what you’ve read is filled with noise. In the blogging world, it’s called filler.
So let’s get to what’s important – valuation.
Better yet, let’s apply Charlie Munger’s model of always inverting everything.
What AAPL is Not Worth Today
By inverting, I’m not trying to figure out what it’s worth in the future. Inverting the valuation means I want to know what it isn’t worth today.
To do so, you just do reverse valuations which I’ll be demonstrating by using my trusty sidekick, the OSV Stock Analysis tool.
I’ll go through the following methods.
- reverse DCF valuation
- reverse Graham Growth EPS method
- reverse EPV method
- reverse EBIT Multiples Valuation – NEW
Reverse DCF Valuation of AAPL Today
A year ago when AAPL was trading at $460, the expected growth in its stock price came out to 0.7%. I even accounted for a slight decline in FCF since people were saying that a negative scenario should be considered.
Today, using the last fiscal FCF as the starting point with a 9% discount rate, the expected growth is still only 1%.
Will Apple grow FCF at a rate faster than 1%? I bet it will.
Reverse Graham Growth EPS Method
As a value investor, the formula that Graham created is the closest method to model to growth.
So starting with the TTM EPS of $40.32, I see that 6% growth in earnings is embedded in the stock price. Not far off from the 8% that analysts are expecting, but still a low number considering that this Graham Formula model errs on the side of optimism.
The difference between a 6% growth rate and expected 8% growth rate may seem small, but when you apply it, the difference is substantial.
Take a closer look at the sensitivity matrix below.
Based on the current EPS and 8% growth rate, the price should be around $600.
Again, it looks like AAPL is not worth $530 today.
Reverse Earnings Power Value
EPV is based on zero growth by default so the inputs are easy but a few adjustments need to be made.
I’ve increased maintenance capex to $8,390m which is the TTM value. Enter the latest FCF of $44,245m and adjust the cash to include the offshore accounts (since the cash is listed as other long term assets in the balance sheet instead of cash and equivalents).
I then get a value of $600 for the current scenario. Again the EPV is based on zero growth.
If I factor in a business decline and bring down the normalized income by 10% to $40,000m with the same capex, the EPV is still $548 per share.
Reverse EBIT Multiples Method
You would think that using EBIT multiples is only for relative valuation, i.e. only useful for making comparisons with competitors. But it’s also a very good reverse valuation method.
For a reverse EBIT multiples valuation to work, you need to use:
- the TTM revenue of $173,992m
- the TTM EV/EBIT multiple of 9x
- the cash value of $158,842m
Plug that into the calculator as shown below and the valuation based on TTM performance is $680 per share.
But the normal scenario intrinsic value of $680 is way higher than the $530. For AAPL to be valued near $530, it has to be valued at a multiple of 7x.
In other words, the market is expecting negative growth.
However, a multiple of 7x EBIT is unrealistic as AAPL has never traded below 8. Even during its worst times in the past 10 years it wasn’t 7x. And currently, I don’t see a situation that is so dire, that AAPL deserves to be priced at just 7x.
Here’s a look at the historical multiples.
So How Much is AAPL it Really Worth?
First, the current expectations are far too low.
But by making conservative and realistic assumptions, I get an average intrinsic value of $690 after ignoring the NCAV and total net reproduction cost as those are balance sheet numbers.
I’m not expecting the glory days of 30+% growth.
Now that’s absurd.
Before I invested in AAPL, I always mentioned that the law of big numbers would catch up with them and it did. It’s not going to go up 80% in a year, but for the quality and valuation, this is an easy one for me.
Quick Valuation Notes
Each of the valuation methods I’ve used are independent to each other. One model doesn’t feed into another. It doesn’t affect other models if a change is made.
The DCF uses free cash flows, Graham’s formula focuses on current earnings, EPV looks at normalized income and EBIT multiples is used based on latest revenue. Each uses a different angles of stock valuation so that I don’t get blinded by just one aspect.
Although the methods of valuing a business is different, they all point to an underappreciated stock.
Now your turn.
How much is AAPL worth?