Running the Numbers: The Roller Coaster That Is Apple

It has been a crazy 15 months for the Apple (AAPL) share price. On the 22 August 2008 AAPL was trading at $176.79. By 16 January 2009 AAPL had dropped to $82.33 - down over half (53% down) in under five months. Today AAPL closed at $190.01 - up over 130% in under nine months. The graph below shows the closing prices over the period. So what do we think about AAPL?

Valuecruncher Interactive Analysts Report For Apple (AAPL)

We have the comparative group set as Microsoft (MSFT), IBM, Google (GOOG) and Hewlett-Packard (HPQ). You can change these peer companies on the site. For example you could add:

1. Research In Motion (RIMM) - Interactive Analyst Report For $RIM
2. Palm (PALM) - Interactive Analyst Report For $PALM
3. Qualcomm (QCOM) - Interactive Analyst Report For $QCOM

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$176.16 for AAPL - 7.3% below the current share price. We see AAPL overvalued at the moment. But how about compared to a peer group?

Comparison Analysis

I changed the peer group companies to IBM, RIMM, PALM and QCOM. I am going to look at two of the metrics we use at Valuecruncher - Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis AAPL is trading at 4.5x (AAPL is being valued at 4.5x last year’s revenues). This compares to IBM at 1.7x, RIMM at 3.5x, PALM at 3.4x and QCOM at 5.8x. AAPL’s profit margins (at the EBITDA line) are 20.9% of revenues. A dollar of AAPL revenues is being valued more than a dollar of RIMM revenues - despite that dollar of revenues producing less profit (on an EBITDA basis) than the RIMM revenues. A dollar of AAPL revenues is being valued less than a dollar of QCOM revenues - but QCOM produces nearly twice the profit (on an EBITDA basis) as $AAPL. We would expect the difference between the multiples for QCOM and AAPL to be larger - in QCOM’s favour. There are some big growth expectations for AAPL - on an EV/Revenue basis there appears to be a premium being paid for AAPL against the peer group.

If we lower the AAPL EV/Revenue multiple to 3.75x (a slight premium to RIMM) then this gives a share price of $163.30 - 14% below the current share price.

click to enlarge

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis AAPL is trading at 21.51x (AAPL is being valued at 21.5x last year’s profit at the EBITDA line). A dollar of AAPL EBITDA is worth more than double a dollar of IBM, RIMM or QCOM EBITDA (PALM is losing money at the EBITDA line).

If we lower the AAPL EV/EBITDA multiple to 17.5x (a slight premium to QCOM) then this gives a share price of $160.06 - 16% below the current share price.

Summary

Based on our DCF valuation - AAPL looks overvalued. Looking at some comparators - the market is valuing AAPL highly compared to some peers. We believe if you are investing in AAPL at the current price - you are paying a full price and there are cheaper options available. We do recognize that there are a lot of AAPL fans out there however.

Disclosure: No positions

Comments

[westech]

GAAP or non-GAAP???

2009 Oct 08 07:28 AM

[Macbeutling]

They will never learn it :-)
Wait until next year, when Apple changed accounting to non-GAAP an the actual price will prove more than cheap.

2009 Oct 08 07:38 AM

[See through it]

Your analysis is so wrong that it's astounding. The FASB just changed the accounting rules that apply to Apple so that their earnings will no longer be dramatically understated. This is well known. Using the old GAAP numbers for comparison is grossly wrong and smacks of incompetence. BTW, APPL is underpriced (based on growth rates and earnings) compared to these stocks (and all tech stocks in general) when you use data the accounts for their real earnings.

2009 Oct 08 07:51 AM

[Jon T]

Show me a "peer" that has an iPhone, an iPod, a Mac, chipdesign, iTunes, highest sales per foot stores ever, or a Steve Jobs, or even a Jonny Ive. 

People must understand that Apple is completely incomparable to any other business, ever.

The analysis above is worthless. TOTALLY worthless!

2009 Oct 08 08:11 AM

[top_tier]

You make no accounting for Apple's huge cash hoard and use GAAP accounting comps. Disinformation at it's finest.

2009 Oct 08 08:25 AM

[Tom B]

This is the hazard of sticking numbers into Excel spreadsheets instead of actually thinking.


On Oct 08 08:11 AM Jon T wrote:

>
> Show me a "peer" that has an iPhone, an iPod, a Mac, chipdesign,
> iTunes, highest sales per foot stores ever, or a Steve Jobs, or even
> a Jonny Ive. 
>
> People must understand that Apple is completely incomparable to any
> other business, ever.
>
> The analysis above is worthless. TOTALLY worthless!

2009 Oct 08 08:47 AM

[gvsmitty19]

This is garbage analysis 101. No mention of Non-GAAP accounting or Apple's large cash position. How do you account for all those deferred iPhone revenues that had to be pushed back? What a joke.

2009 Oct 08 08:48 AM

[hrant]

So called expert like you onstantly underestimate the value of Apple shares. you think Microsoft ,Ibm ?
give me a break !

Apple at $250 /share next year .

2009 Oct 08 09:29 AM

[tsullivan112008]

Not sure that Apple's I tunes division is fully discounted in the stock just yet. It was not created as a profit center according to one report I read and yet it has become a solid profit generator.

2009 Oct 08 09:56 AM

[iJah420]

FUD very simply stated.

2009 Oct 08 10:21 AM

[Dialectical Materialist]

I love using debt to equity as part of my measurement of how solid a company is... IBM is north of 100. Palm is NEGATIVE. Only Qcom (.9) and AAPL (0) have good numbers there. And zero debt means a lot in this economic climate. You could argue IBM's is high because of the business it is in... but then it is not actually a peer of AAPL then is it?

2009 Oct 08 11:01 AM

[sasha1975]

i wonder what you wud think about a seriously overrated stock like PALM.

btw ... i think the analysis is totally off the mark.

2009 Oct 08 11:02 AM

[RLLH]

I have to be suspicious when a company changes the accounting rules to make itself look better. Enron or Worldcom always come to mind.

2009 Oct 08 11:24 AM

[Stuff and Nonsense]

The fact that there was not even any mention of GAAP vs. non-GAAP earnings leads to the conclusion that this is either a deliberate hit-piece, or the "analytic" product of someone who knows nothing at all about the company and its business.

It's really rather sad that people pass this stuff off as "analysis" when it is so glaringly lacking.

2009 Oct 08 11:28 AM

[iliketogolf]

Your the one that is so absurdly wrong with regard to earnings. anyone that thinks that an accounting change (picture an accountant making a journal entry) can change the value of teh company is very ignorant. The FASB change does not increase cash flow or increase the numbers of iphones sold. It does nothing to change the economics of the business or cash flow. It is simply form over substance. The multiple will drop with the increase in paper earnings. You and the others that believe the value goes up over an accounting change are simpletons.

On Oct 08 07:51 AM See through it wrote:

> Your analysis is so wrong that it's astounding. The FASB just changed
> the accounting rules that apply to Apple so that their earnings will
> no longer be dramatically understated. This is well known. Using
> the old GAAP numbers for comparison is grossly wrong and smacks of
> incompetence. BTW, APPL is underpriced (based on growth rates and
> earnings) compared to these stocks (and all tech stocks in general)
> when you use data the accounts for their real earnings.

2009 Oct 08 11:44 AM

[Anthony B]

I'd like to see the same analysis with Discounted Cash Flows of Operating Cash Flows. Why did you use EBITDA? EBITDA still starts with Non-GAAP earnings.

I think AAPL is fairly valued right now at about 19x 2010 earnings. That's with $10/share earnings estimate. If that estimate is on the low side (some analysts are predicting $11) then you're paying about 17X forward earnings. These are GAAP earnings estimates for 2010, since by then the accounting change will be in effect and the difference between GAAP and non-GAAP will once again become negligible.

2009 Oct 08 11:44 AM

[Wireless Wiz]

Until you actually do the homework and follow the cash. Then you realize that nothing fundamentally has changed about the cash flows, just the period in which they are recognized. What has changed? The perception about the earnings power of the company. If you follow Free Cash Flow then you'd already knew what their true earnings were last year: $10/share.


On Oct 08 11:24 AM RLLH wrote:

> I have to be suspicious when a company changes the accounting rules
> to make itself look better. Enron or Worldcom always come to mind.

2009 Oct 08 11:49 AM

[Stefan Sidahmed]

The accounting change will better make their financial statements reflect the economics of their business. This is not hokus-pokus.


On Oct 08 11:24 AM RLLH wrote:

> I have to be suspicious when a company changes the accounting rules
> to make itself look better. Enron or Worldcom always come to mind.

2009 Oct 08 11:51 AM

[Wireless Wiz]

cash is worth cash, and they have about $35/share. subtract that before doing a multiple analysis and you get closer to 16x trailing fcf/share (true measure of "earnings").


On Oct 08 11:44 AM Anthony B wrote:

> I'd like to see the same analysis with Discounted Cash Flows of Operating
> Cash Flows. Why did you use EBITDA? EBITDA still starts with Non-GAAP
> earnings.
>
> I think AAPL is fairly valued right now at about 19x 2010 earnings.
> That's with $10/share earnings estimate. If that estimate is on
> the low side (some analysts are predicting $11) then you're paying
> about 17X forward earnings. These are GAAP earnings estimates for
> 2010, since by then the accounting change will be in effect and the
> difference between GAAP and non-GAAP will once again become negligible.

2009 Oct 08 11:52 AM

[Wireless Wiz]

Stick with golf then, your heated response is absurd. It is not the actual value that changes, but the perception thereof. When you have to defer a huge chunck of revenues and assoc cogs into the future for one of your hottest products, then yes, perhaps the true earnings do get understated. When you no longer have to defer those amounts, a better picture of the actual economics of the business emerges. That is all that is happening here. And if you were smart enough to follow the free cash flow, then all this wouldn't even matter. And Apple disclosed that they produced over $9 billion of fcf last year, or roughly $10/share. This is true cash in the bank earnings, not accounting gimmickry.


On Oct 08 11:44 AM iliketogolf wrote:

>
> Your the one that is so absurdly wrong with regard to earnings.
> anyone that thinks that an accounting change (picture an accountant
> making a journal entry) can change the value of teh company is very
> ignorant. The FASB change does not increase cash flow or increase
> the numbers of iphones sold. It does nothing to change the economics
> of the business or cash flow. It is simply form over substance.
> The multiple will drop with the increase in paper earnings. You
> and the others that believe the value goes up over an accounting
> change are simpletons.
>
> On Oct 08 07:51 AM See through it wrote:

2009 Oct 08 11:59 AM