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Apple: A Good Value Buy Before It Reaches $1 Trillion Market Cap

September 24, 2012 | About:
These days, investors are talking a lot about Apple (AAPL), and many of us don't know whether we should buy Apple for our portfolios or not. Its share price is passing $700, making it the largest publicly traded company on the planet, with more than $656 billion in market capitalization. Can Apple become a trillion dollar company anytime soon? Is Apple's stock price currently cheap or expensive? In order to figure whether it's cheap or expensive, we have to look at its fundamentals.

Operating figures and historical growth

Apple is a very rare case in that it is the biggest publicly traded company in the world, and it is a growth company. It has been growing tremendously since Steve Jobs came back and brought the company forward. Here are some key operating figures:

USD million20042005200620072008200920102011TTM
Revenue8,27913,93119,31524,00632,47942,90565,225108,249148,812
Op. income3261,6502,4534,4096,27511,74018,38533,79053,007
Net Income2761,3351,9893,4964,8348,23514,01325,92240,133
CFO9342,5352,2205,4709,59610,15918,59537,52952,149
FCF7582,2751,5634,4848,3978,94616,47430,07741,677


Since 2004, Apple has experienced fantastic growth in its operating fundamentals. The annualized growth for the last eight years of revenue, operating income and net income are 37.9%, 78.6% and 76.4% respectively. In addition, Apple is a cash cow machine as well, its eight-year annualized growth in operating cash flow and free cash flow are 58.7% and 58.4% respectively. Currently, trailing 12-month figures are extremely encouraging as well: TTM operating income and net income are nearly double compared to 2011, citing much more growth for Apple since September 2011.

Balance Sheet Strength

Apple is not only a growth and cash cow company, but it is also a debt-free company with lots of cash and investments on hand. As of June 2012, it had $27.6 billion in cash, $89.5 billion long-term marketable equity investments, $111.7 billion in shareholders' equity and no debt. In $89.5 billion of equity investments, $37.3 billion was in corporate securities, $16.7 billion was in U.S. agency securities and $15.3 billion was in U.S. Treasury securities. Average maturities for those investments range from one to five years. In its recent quarterly SEC filing, Apple mentioned its long-term marketable securities investments: "The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade, with the primary objective of minimizing the potential risk of principal loss."

Business

Apple offers terrific brands around its products such as iPod, iPhone, iPad, Mac, etc. And it has great integration among those products. David Einhorn once said that Apple was one of the most misunderstood stocks out there, despite being widely held. He didn't consider Apple a hardware company; rather it was a software company, which lodged its operating system and products in a high-margin device. That is true; in order to use Apple's iOS, iTunes, App store, and the rest, one has to buy Apple products. It represents the "stickiness" of Apple's software, with no privacy problems. Even if the Chinese want to use Apple's products, they have to buy real Apple, not a fake.

Apple's cost factors

As David Einhorn pointed out, there was quite a high margin in Apple's products. Let's take iPhone 5, the recent hit in the mobile phone market place, for example.

943113_13484834014094_0_thumb.jpg

As we can see from the table above, Apple has to pay out $207, $217 and $238 for its iPhone 5 16GB, 32GB and 64GB respectively, whereas it charges $649, $749 and $849 as retail price without contracts. The gross margin is incredibly high, in the range of 68-72%. The more GB version customers choose, the higher gross margin Apple receives.

Comparing with other big PC and mobile manufacturers in the market place, Apple is the most outstanding:

%Gross margin (TTM)Net margin
Apple44.10%27%
Nokia (NOK)27%-10.70%
Research in Motion (RIMM)31.90%-0.30%
Hewlett Packard (HPQ)1.50%-4.54%
Dell (DELL)21.70%5.01%




Valuation


With the strong balance sheet and fantastic growth, however, Apple is trading at a quite reasonable valuation. Its share price is $700 per share; the total market capitalization is $656.27 billion. Apple is valued by the market at 16.4x P/E, 5.9x P/B and 12.7x P/CF.

If we do discounted free cash flow analysis for Apple, and we conservatively estimate that its growth would be only 20% in the next five years (although it has experienced 10-year annualized growth of more than 58%), then the perpetual growth would be 2% after that, and the discount rate is 10%.

USD million201220132014201520162017Terminal value
FCF41,67750,01260,01572,01886,421103,7061,322,248
PV45,46649,59954,10859,02764,393746,374
Est. Value1,018,967
5 year growthTerminal growthDiscount rate
20%2%10%


Following our discounted free cash flow analysis method with the above assumptions, the estimated intrinsic value of Apple would be around $1 trillion.

So is the current market price too high for Apple's estimated real value? I don't think so. Apple still remains a good value buy in investors' diversified portfolios.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 2.9/5 (25 votes)

Comments

yhlbb
Yhlbb - 1 year ago
The iPAD mini coming in Oct. will also be a factor. I sold all my Vanguard mutual funds, and some 401K stocks that I don't have faith in (excluding BRK-B of cause) to buy more AAPL.

Glad to see an article on AAPL here (I only pay attention to what Buffett and Einhorn buy).

Just add the market value lost of these companies to APPL: RIM, Nokia, HP, Dell, Intel, Acer, HTC, Sony, Nentendo (and other video game makers), Samsung (soon), etc.

P.S.

For the Guru-focus developers: it's a good idea to add a left-margin spacer, so that the content of the web page looks better on screen.
trotta
Trotta - 1 year ago
About 3/4 of your value lie beyond 2017. How confident can one really be of your estimate? Let's think of Sony, Nokia, RIMM. It seems far too risky to call it a value investment.
SeaBud
SeaBud premium member - 1 year ago
I work in this space and am a value investor. Here is my .02cents for what it is worth. By balance sheet, Apple is undoubtedly healthy. However, if you follow Buffet, what is the moat? Why do you think Apple will be able to continue growth/margins that are beyond exceptional compared to the market and history. I believe they will not command 80% margins unendingly while others take 20% margins. There is just no precedent in the technology space for that type of margin difference.

People will say "but Apple is an ecosystem, not a technology." That is true - but other ecosystems can and are forming. Here are the forces that want to eat some of Apples margins: Intel (the entire semiconductor industry actually), Google, Microsoft, Samsung, HTC (all smart phone makers), content providers (HBO, studios, music industry), AT&T, Sprint (carriers - would LOVE to have consumers want any non-Apple product because margins are higher.

You can think apple is and always will be smarter and more capable than all these companies but I've worked with all these companies and all have smart, and not so smart, people. I can give you the attack plans of these companies but you can read it yourself (Win 8 for softie, Google maps). Apple certainly has a lead. I don't see Apples fall starting until next year and I don't see it being recognized for 3-5 years - but I believe the peak of Apple is today. When their margins start to shrink to more normal and their ecosystem is attacked their balance sheet will still look good but the valuation on earnings and growth will not. That is my prediction based on the industry, but it is just a guess like anybody else.

I would consider Apple an investment in a growth stock that has proven over the last decade that they can innovate, but that before that innovated and almost went bankrupt. Jobs being gone is a huge risk and the likelihood of them producing huge products that drive growth/margins akin to the past 10 years seems a high risk that people should take seriously. Good luck.
yhlbb
Yhlbb - 1 year ago
As long as people worldwide are queued to buy the company's product, the company cannot make enough products to meet the demand, and the product earns a very high profit margin, it's a huge moat filled with cash to me.

The key is whether Apple has "durable competitive advantage.”

Currently, I don't see a credible threat. You might say how about Android. Well, I think Android is a very good device to let people know how superior Apple's device is.

cng700
Cng700 - 1 year ago
If Android was really that inferior, they wouldn't have captured almost 70% market share and Samsung would not be the number one smart phone manufacturer.

Things can and do change at lightning speed in this industry.
SeaBud
SeaBud premium member - 1 year ago
Forgot to address a point raised by Yhibb in my post above. To Americans, Apple is awesome. To many in Asia, the Apple ecosystem is an American ecosystem that has far less value to them. (ie, paying for music from itunes in China...really expect that to be widespread?). The ease of use that Americans will pay a huge premium for is doubtful in poorer countries like China/India.

The "worldwide ques" are really US and maybe Tokyo/Bejing ques. Like Cng700 said, if Android is so inferior then why do they sell more phones worldwide than Apple... and I will bet you that Apple's share in China/india will not explode at a rate anything like in the US...
manojbms
Manojbms - 1 year ago


The Buffett comment on if a truly extraordinary business today being so 5 years later rhymes strongly in my ears. not 100% sure of going long, but I wouldn't be shorting this one

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