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Running The Numbers – Apple (AAPL) Looks Cheap

This valuation is part of this blog post:

http://blog.valuecruncher.com/2008/09/running-the-numbers-–-apple-aapl-looks-cheap/

Valuecruncher produces a valuation of US$163.98 for AAPL. This is a current valuation not a target price. This valuation is 25% above the current share price of US$131.05 (note our model picks up an earlier price of US$140.91 because we completed the valuation earlier).

Assumptions

Our assumptions are revenues of US$32.5 billion in 2008 growing to US$50.0 billion in 2010. We have used an EBITDA margin of 20.5% in 2008 dropping to 19.5% in 2010. We used a terminal growth rate of 5.75%. We used a terminal capital expenditure number of US$1.25 billion. We have used a WACC (discount rate) of 10.0%. All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation.

Below US$150 a share Apple (AAPL) looks a buy

This valuation is part of this blog post:

http://blog.valuecruncher.com/2008/07/below-us150-a-share-apple-aapl-looks-a-buy/

Apple (AAPL) Valuation Assumptions

Our assumptions are revenues of US$32.8 billion in 2008 growing to US$50.0 billion in 2010. We have used a flat EBITDA margin of 21% from 2008. We used a terminal growth rate of 5.75%. We used a terminal capital expenditure number of US$1.0 billion. We have used a WACC (discount rate) of 11.0%.

Our analysis incorporates the cash on the Apple balance sheet – Valuecruncher calculates a net debt number.

Apple is a great company with incredibly innovative products that consumers all around the world want desperately. That is a position that must be envied by all their competitors in the technology space and beyond.

Warren Buffett’s famous quote is “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. At around US$150 a share – in our view Apple fits that criteria.

Getting AAPL to $200 a share

This valuation is part of this blog post:

http://blog.valuecruncher.com/2008/06/getting-apple-to-200-a-share/

Starting with this valuation:

http://www.valuecruncher.com/valuations/924/edit

To move the valuation we looked at three key levers:

1. The discount rate (or weighted average cost of capital – WACC). This is a measure of the variability (both up and down) of the cash flows generated by AAPL. The more variable the cash flows the higher the discount rate. Because we are trying to get the valuation to $200 we looked at lowering the discount rate from our base case 11.0%. If we lower the base case discount rate to 10.0% (keeping all the other assumptions constant) we increase our valuation to $175.53 (a 20% increase – but still below the current share price).

2. The terminal growth (the rate of growth into the future beyond our three-year forecast period). At Valuecruncher we use a present value calculation to determine this growth rate (the present value of five years of cash flows beyond our three years of forecasts and an economy wide terminal rate – 3.5%). In our base case the 2009 to 2010 growth rate is expected to be 18-20% - based on analyst estimates. We used a 17.5% growth rate in 2011 dropping to a terminal rate of 3.5% from 2015. In this case we used a 25% growth rate in 2011 (this is above current 2009/10 forecasts of 18-20%) dropping to a terminal rate of 3.5% in 2015 – this gives a terminal growth rate of 6.25% compared to 5.75% in the base case. If we increase the terminal growth rate to 6.25% (keeping all the other assumptions constant) we increase our valuation to $159.11 (an 8% increase).

3. The terminal capital expenditure (CAPEX). This is the investment in plant, equipment and technology needed to maintain and grow the cash produced by the business expressed in revenues and profits. In our base case we used a US$900 million terminal CAPEX number. If we reduce this by US$100 million we increase our valuation to $148.49 (a 1% increase).

However if we adjust all three of these levers at the same time – discount rate to 10%, terminal growth to 6.25% and terminal CAPEX to US$800 million (while keeping all the other base case assumptions constant) – we do get close to $200 a share. The combination of those adjustments to our base case valuation is shown in the link below to a new valuation created using the Valuecruncher valuation tool. The result is a valuation of $197.63 – this is 35% above our base case valuation and 6% above the current share price.

AAPL Base Case

This valuation is part of this blog post:

http://blog.valuecruncher.com/2008/06/getting-apple-to-200-a-share/

Our assumptions are revenues of US$32.8 billion in 2008 growing to US$48.0 billion in 2010. We have used a flat EBITDA margin of 21% from 2008. We have used a terminal growth rate of 5.75%. We calculated that using a present value calculation with the growth rate dropping from 17.5% in 2011 to 3.5% in 2015 (the current projected growth from 2009 to 2010 is 18-20%). We used a terminal capital expenditure number of US$900 million. We have used a WACC (discount rate) of 11.0%.

Analysts are calling 200!

WWDC always sees a emotional spike in the stock price - clearly overvalued based on the numbers but it could be realized with a lower discount rate and better terminal growth potential..