Apple (AAPL) Valuation – Part 2

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So a lot of people have been complaining that I was too conservative with my first valuation of AAPL. I assumed that AAPL would grow at 14.3% for the first 3 years, slowed down 10% in yrs 4-7 and further slowed down 10% in yrs 8-10 until the company slowed down to a steady 5% from yrs 10-20.

Why Do it This Way?

1) I am valuing a business, not a 4 letter ticker symbol
2) I’m not optimistic enough to believe that a company can grow at 20-30% for the next 10-20 years
3) I am valuing based on assets and previous performance
4) I want a solid, reliable investment. Not an emotional roller coaster.

More Realistic Growth

So you still think I need a realistic growth rate considering how Apple will take over the world… Well what is a realistic growth? I don’t believe there is such a thing since all growth predictions are just that… predictions. That is why I don’t care what growth rate the ‘pros’ give it.

And unless you are God, I won’t believe anyone trying to predict the future.

A More Aggressive Growth Situation

If I had used the growth rate based on AAPL’s FCF growth over the past 10 years, the growth rate would be 44%! That’s staggering! Apple was able to generate on average 44% free cash flow each year for the past 10 years. Can AAPL generate FCF at 44% for the next 10 years? Maybe, maybe not. I like to keep things safe and stick with the ‘maybe not’ option. After all, it’s my money I’m putting down, and I don’t want to lose it.

So just this once, I will use the 5 yr projected growth rate from Yahoo which is 22%.
So in years 1-5, growth rate will be 22%, slowed down 10% in yr 6-8, slowed down another 10% in yr 9-10, until it grows at 5% from yr 10-20.

Based on these assumptions, the present value of the future cash and its networth today comes out to be $172 billion. Which translates to an intrinsic value of $193.20.

In my first post I got an intrinsic value of $130 with a very conservative rate of 14.3%
Using a more ‘aggressive’ rate of 22% gives me an intrinsic value of $193.20

See the images below to see some ratios and calculations. (The first image got cut off but it should be from 1998-2007)

Price Follows Value

Now look at the following 2 graphs which represent actual stock price and calculated intrinsic value. The first one is the conservative scenario. The second one, aggressive.

Notice how price follows value?

In the conservative case, we see a situation where the market pushes the price up way above its intrinsic value. In the aggressive case, we see that if people had SOLD AAPL at $193, they would be sitting on some big fat profits before the market dived.

In either case, one has now reached its intrinsic value and the other is getting close to a buy price target. You be the judge.

It’s Just a Numbers Game

I could have made the intrinsic value come out to be $400 or $1000 just as easily. That’s what the speculators want to hear and they just want the affirmation of other people to agree with them. Don’t just fiddle the numbers to match the feeling you have about this stock.

Problems with the darlings on Wall Street is that people start buying just because someone else did. They find safety in numbers and in the deluded fact that if it goes down, at least they wont be the only fool.

Don’t be that fool. Buy companies based on objective analysis and reason.

I hold no shares of AAPL

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3 responses to “Apple (AAPL) Valuation – Part 2”

  1. Suresh says:

    Was wondering if you could publish a copy of your valuation model so that I can tweak with the assumptions learn from that.

  2. Jae Jun says:

    Hi Suresh,
    I do plan to upload my valuation excel. Hopefully soon. The only thing is, I had my laptop stolen and I just received my new laptop, but it doesn’t have office or anything and I don’t know how to use Vista yet… :o(

  3. Julian says:

    Interesting how far out both estimates were in retrospect. They both hugely underestimated earnings growth over the subsequent three years and thus intrinsic value.

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