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?
- Research In Motion (RIMM) - Interactive Analyst Report For $RIM
- Palm (PALM) - Interactive Analyst Report For $PALM
- 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?
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.
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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.
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