Despite the individuals who have established a long position in Apple (AAPL) based upon strong vested interest in Apple's business model, there are a significant number of market participants who exhibit a highly short-term driven approach to analyzing Apple's performance. Whether the topic of focus for these short-term oriented individuals involves analyzing intra-day price fluctuations or changes in events from day-to-day, they both create an issue of credibility. Predictions made concerning the long-term future of Apple are inconclusive when they are made by analyzing trading patterns over a couple of days. In actuality, it makes me wonder what ever happen traditional or even modern methods of valuation. The market capitalization of Apple is enormous and you will realize I am not here to classify these short-term investors as market makers. I am simply trying to recognize the fact that there are a tremendous number of daily publications that are hyper-focused on making predictions about the future performance of Apple, while the underlying assumptions are made solely based on Apple's attributes revealed in one day. In light of this, I have made a strong attempt to veer away from traditional articles that make speculative bets on the future of Apple's stock price. The typical fundamental discussion has been excluded because I am sure you have read your fair share of those already. This article analyzes the variation in price targets for Apple, provides a valuation model to help place an value on Apple's operations, and last concludes with an estimated intrinsic value per share.
Figure 1 below reveals the price targets from 38 different analysts, which has been extracted from numerous sources (see end of article). The data has been categorized by target price in acceding order to easily display the minimum and maximum values. Note the price estimates used in this analysis have been revised within the past two weeks. The time frame range of these estimates varies from October 25, 2012 to November 6, 2012.
Figure 1: Analyst's Price Targets
To capture the overall idea of what analysts are anticipating over the next six months, I computed a few statistics based off the sample of price targets. As you can see the average price target for Apple is approximately $763.
Figure 2: Price Target Sample Statistics
To determine an estimate for Apple's intrinsic share value that is both conservative and accurate, I used the corporation valuation model. This model is based on three key underlying assumptions including Apple's current free cash flows, Apple's weighted average cost of capital, and the firm-specific growth rate. This model begins by projecting free cash flows forward and then divides the product of that by the difference between the weighted average cost of the capital and the growth rate. This figure results in the value of operations. Next, if you take a look below at figure 3 you will see I accounted for investments in operating working capital by adding short-term investments to the value of operations, which resulted in an approximation for the total value of the firm. As you may already know, Apple has no debt or preferred stock, which made it very easy to compute the value of equity. Last, to compute the intrinsic price per share I divided the total value of equity by the number of shares outstanding. Note that this model does not account for buybacks. Therefore the number of shares out standing remained constant across all four estimates including September 30 of 2012, FY 2012, FY 2013, and FY 2014. In addition, I also held the weighted average cost of capital constant with the assumption that Apple would continue their current capital structure and not issue debt or preferred stock.
Figure 3: Corporate Valuation Model
(click to enlarge)
The free cash flow estimate I used for the first period was the most recent value available for the period ended September 30, 2013. For the remaining estimates I used approximations for the free cash flow values. Using Apple's weighted average cost of capital, 10.2% and a constant growth rate of 3% I computed an intrinsic share value of $651.50. Using the same methods I calculated the intrinsic share value estimates for FY 2013, FY 2013, and FY 2014 as well. The only altercations I made to the model were in FY 2013 and FY 2014, I accounted for increases in short-term investments as well as an increase the growth rate in FY 2013.
The existence of a three way equilibrium between the real market value per share, analysts price targets, and true intrinsic value per share is what every investor long Apple is after. In conclusion, monitoring Apple's cash flows and intrinsic valuation should be the area of concern for value investors. Analysts evidently have positive expectation that Apple's market value will be efficient and coincide with true intrinsic value. It is merely a matter of time.
Sources: Data used to construct the above figures was retrieved from Google Finance, Yahoo Finance, The Apple Insider, Mac Daily News, The Wall Street Pit, The Fiscal Times, Value Walk, i4u.com, The Street, CNBC, 99 Wall Street, and Street Insider.
Disclosure: I am long AAPL.