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???

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.

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.

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!

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.

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!

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.

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 .

Oct 08 09:29 AM

[tsullivan11...:]

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.

Oct 08 09:56 AM

[iJah420:]

FUD very simply stated.

Oct 08 10:21 AM

[Dialectical...:]

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?

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.

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.

Oct 08 11:24 AM

[Stuff and N...:]

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.

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.

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.

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.

Oct 08 11:49 AM

[Stefan Sida...:]

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.

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.

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:

Oct 08 11:59 AM

[Stefan Sida...:]

Your DCF is using GAAP revenues and is flawed. GAAP underscores 2009 sales by about $10B. Of course you would have to adjust all your forward revenues.

Oct 08 12:11 PM

[PalinTologist:]

He rates PALM as 'slightly undervalued'. There is a link to the PALM report at the beginning of this ridiculous article.


On Oct 08 11:02 AM sasha1975 wrote:

> i wonder what you wud think about a seriously overrated stock like
> PALM.
>
> btw ... i think the analysis is totally off the mark.

Oct 08 12:16 PM

[Stefan Sida...:]

... or, if you don't want to fiddle with GAAP/non-GAAP, just go to the Statement Of Cash Flows and calculate a FCF. You will find it does not correlate at all with revenues, so substituting EBITDA for FCF does not work for this company.


On Oct 08 12:11 PM Stefan Sidahmed wrote:

> Your DCF is using GAAP revenues and is flawed. GAAP underscores
> 2009 sales by about $10B. Of course you would have to adjust all
> your forward revenues.

Oct 08 12:29 PM

[iliketogolf:]

Are you not justifying my position? all i'm saying is that for those that think the value of this stock will pop (e.g. cramer) simply because earnings are recognized in the current period rather than amortized are dead wrong. its all about cash flow and nothing about the accounting change will change cash flow or the valuation of aapl


On Oct 08 11:59 AM Wireless Wiz wrote:

> 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.

Oct 08 12:30 PM

[JamesApple:]

What encourages me most about Apple is it's fiscal wisdom in the lack of acquisitions, the wisely spent capital on expanding/building of network operations centers, the release of Snow Leopard, the escalating accumulation of cash, the complete capture of high end smartphone markets, and the return of Mr. Steve Jobs.

Oct 08 02:12 PM

[westech:]

Cramer has said he expects a pop in the stock price when Apple goes to non-GAAP accounting because most analysts have not yet realised what this means. I though no analyst could be that stupid until I read this article. This has to be the worst analysis I have ever read, bar none.

Oct 08 03:43 PM

[Tom B:]

They make modest, strategic acquisitions. iTunes (was SoundJam), PASemi, Final Cut Pro. Three examples. No product from PASemi, yet, but maybe by 2010.

On Oct 08 02:12 PM JamesApple wrote:

> What encourages me most about Apple is it's fiscal wisdom in the
> lack of acquisitions, the wisely spent capital on expanding/building
> of network operations centers, the release of Snow Leopard, the escalating
> accumulation of cash, the complete capture of high end smartphone
> markets, and the return of Mr. Steve Jobs.

Oct 08 04:17 PM

[Dialectical...:]

You are right to be suspicious. The finanicial companies, for example, are using all kinds of games to hide losses and put lipstick on their pigs. But in AAPL's case, the change is not their idea. They have been following the rules by counting iPhone earnings over 8 quarters, which doesn't accurately portray the power of their earnings. Those rules which require them to do this will be changing and they will begin using the rules that allow them to more accurately reflect their earnings from iPhone sales. So this is not a trick, it's a change in the rules. And like others have said, it will not change the value of the company. What it will do, though, is make it more obvious just how much money they are making to those who were too casual with their inspection of the numbers... so for some folks there may be a realization that this company is very very rich and printing their own money at will. What others of us have been saying for a long time.


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.

Oct 08 04:39 PM

[JamesApple:]

I mentioned Apple's wisdom in its lack of acquisitions, not absence of. SoundJam etc. were acquired prior to this fiscal year. Apple is much wiser business wise than Rim which went after NHL teams unsuccessfully, failed in bidding for Nortel assets, and absolutely bombed in acquiring Torch to try adding lipstick to the blackberryOS which is an old buggy pig.

Oct 08 05:03 PM

[brewer:]

Running the numbers obviously requires no experience with the products and services, and no thought. If you ran the 'numbers' 10 years ago, how utterly wrong would your analysis have been? It'd have been dead wrong. And yet, look what happened.

I give Apple a year to be worth far more than msft. They are already at about 3/4 market cap.

Oct 08 05:29 PM

[forge98:]

Some of you people make me sick. The author is hardly slamming AAPL. Yet you freak out at the thought that precious AAPL may be slightly over valued. AAPL produces nothing. They design toys. They charge way more than everyone else. I don't care how much cash they generate. To me, I would never buy it here because soon the consumer will be forced to choose between necessities and toys.

Oct 08 09:29 PM

[Tom B:]

Unless you are a hard core LINUX or BSD user, you are talking out of your butt. Even with Win7, MSFT fails to deliver a modern OS, with UNIX-level performance and security. It is THEY who make the "toys". Talk to people who really USE their computers-- people who do high end graphics, audio, video, science, college professors-- these people are much more likely to use Macs than the general population.

The reason the stock is UNDERvalued is because 90% of people are still using Windows. I'll tell you, things change over time. In the 1980's, a lot of people were using Commodores.


On Oct 08 09:29 PM forge98 wrote:

> Some of you people make me sick. The author is hardly slamming AAPL.
> Yet you freak out at the thought that precious AAPL may be slightly
> over valued. AAPL produces nothing. They design toys. They charge
> way more than everyone else. I don't care how much cash they generate.
> To me, I would never buy it here because soon the consumer will be
> forced to choose between necessities and toys.

Oct 08 10:17 PM

[despicable:]

Year after year, AAPL keeps on outperforming and making money for me. Yet many analysts and most of the tech net keep on posting these dumb articles about why Apple is doomed, overvalued, can't last, etc. Ha ha ha. Good luck with that. You just don't get it. There is nothing else in the world, including that pig with lipstick Windows 7, that can compare with Apple, which will hit $250+ in 2010, and continue on up from there.

Oct 09 12:12 AM

[Stefan Sida...:]

Its not about 'love' or 'hate' of Apple. It is about bad analysis.


On Oct 08 09:29 PM forge98 wrote:

> Some of you people make me sick. The author is hardly slamming AAPL.
> Yet you freak out at the thought that precious AAPL may be slightly
> over valued. AAPL produces nothing. They design toys. They charge
> way more than everyone else. I don't care how much cash they generate.
> To me, I would never buy it here because soon the consumer will be
> forced to choose between necessities and toys.

Oct 09 05:16 AM

[relayer75:]

Worthless article. AAPL does not have a peer group. There is no other vertically integrated company that sells high end computers and laptops, has near monopoly status in mp3 players, oh and by the way is the largest seller of music in the world, has the #1 smartphone that is destroying the competition, and did I mention this little thing called the App Store.... Oh, and one more thing...

Oct 09 12:48 PM

[jack dee:]

actually it is about loving apple , here at SA. THe apple fanboys gather and condem anything that has even a slight neg hint about apple.

These are not investors , they are cheerleading fans, confusing sound investing with how much they like apple products.


(long GOOG MSFT MOT )


On Oct 09 05:16 AM Stefan Sidahmed wrote:

> Its not about 'love' or 'hate' of Apple. It is about bad analysis.
>

Oct 09 03:37 PM

[john s. gordon:]

lot of emotion in the above.
i have been an apple user since 1982.
have 3 macs in the house @ the moment.
people who do heavy duty graphics have gotta have their macs.
stock was a market performer from 1985 to end of 2004, since then has outperformed. will they be able to keep it up? remains to be seen. priced today same as december 2007. no dividend.
> jack

Oct 10 08:45 AM

[Paul Zimbardo:]

As many have mentioned GAAP vs. non-GAAP, I thought it was worthwhile to note that the FASB has finalized ASU 2009-13 dealing with Multiple-Deliverable Revenue Arrangements.

Source: www.complianceweek.com.../

Oct 10 07:30 PM

[JW.USC:]

All of what you spewed right there could just as easily describe your commentary on this site. Just replace "apple" with "microsoft".


On Oct 09 03:37 PM jack dee wrote:

> actually it is about loving apple , here at SA. THe apple fanboys
> gather and condem anything that has even a slight neg hint about
> apple.
>
> These are not investors , they are cheerleading fans, confusing sound
> investing with how much they like apple products.

Nov 06 11:41 AM