How to Get Apple to $200 26 comments
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With the WWDC set for June 9-13 and the current (AAPL) share price of $186.10 - we are being asked about whether we see a $200 share price for AAPL in the near term. Now the AAPL share price may reach $200 in the near future – there are a lot of Apple fans out there. Our concern is what business fundamentals would be required to make this $200 appear a reasonable price?
At Valuecruncher we decided to have a look at the underlying financial performance of AAPL required to get to a $200 share price using our models. We have used the Valuecruncher interactive tool for analyzing the company. That means that anyone can follow the links below and amend our valuations. We started by creating a base case valuation of AAPL – using assumptions we believe are reasonable.
AAPL Base Case
Our assumptions are revenues of US$32.8 billion in 2008 growing to US$48.0 billion in 2010. We have used a flat EBITDA margin of 21% from 2008. We have used a terminal growth rate of 5.75%. We calculated that using a present value calculation with the growth rate dropping from 17.5% in 2011 to 3.5% in 2015 (the current projected growth from 2009 to 2010 is 18-20%). We used a terminal capital expenditure number of US$900 million. We have used a WACC (discount rate) of 11.0%.
Valuecruncher Base Case Valuation AAPL
Our analysis gives a share price of $146.70 which is approximately 21% below the current share price of $186.10.
AAPL At $200
To move the valuation we looked at three key levers:
1. The discount rate (or weighted average cost of capital – WACC). This is a measure of the variability (both up and down) of the cash flows generated by AAPL. The more variable the cash flows the higher the discount rate. Because we are trying to get the valuation to $200 we looked at lowering the discount rate from our base case 11.0%. If we lower the base case discount rate to 10.0% (keeping all the other assumptions constant) we increase our valuation to $175.53 (a 20% increase – but still below the current share price).
2. The terminal growth (the rate of growth into the future beyond our three-year forecast period). At Valuecruncher we use a present value calculation to determine this growth rate (the present value of five years of cash flows beyond our three years of forecasts and an economy wide terminal rate – 3.5%). In our base case the 2009 to 2010 growth rate is expected to be 18-20% - based on analyst estimates. We used a 17.5% growth rate in 2011 dropping to a terminal rate of 3.5% from 2015. In this case we used a 25% growth rate in 2011 (this is above current 2009/10 forecasts of 18-20%) dropping to a terminal rate of 3.5% in 2015 – this gives a terminal growth rate of 6.25% compared to 5.75% in the base case. If we increase the terminal growth rate to 6.25% (keeping all the other assumptions constant) we increase our valuation to $159.11 (an 8% increase).
3. The terminal capital expenditure (CAPEX). This is the investment in plant, equipment and technology needed to maintain and grow the cash produced by the business expressed in revenues and profits. In our base case we used a US$900 million terminal CAPEX number. If we reduce this by US$100 million we increase our valuation to $148.49 (a 1% increase).
However if we adjust all three of these levers at the same time – discount rate to 10%, terminal growth to 6.25% and terminal CAPEX to US$800 million (while keeping all the other base case assumptions constant) – we do get close to $200 a share. The combination of those adjustments to our base case valuation is shown in the link below to a new valuation created using the Valuecruncher valuation tool. The result is a valuation of $197.63 – this is 35% above our base case valuation and 6% above the current share price.
Valuecruncher Adjusted Valuation AAPL
Our view is that this adjusted valuation appears optimistic. Play with our assumptions - what does your analysis say?
Disclosure: None.
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This article has 26 comments:
More like 7.75%, which gives a current valuation of 219.22
Company / Price Target:
Piper Jaffey $250
Citibank $248
WR Hambrecht $238
Needham $235
Deutsch Bank $235
Sequoia Capital $231
Pacific Crest raised $225
Thomas Weisel $225
Amer Tach $220
Goldman $220
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BMO Capital markets $205
Lehman $202
S&P $200
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When people buy Apple stock, the price goes up. When they sell it, it goes down. The percentage of investors that actually depends on the ridiculously complex metrics you outline here are probably in the single digits. Low single digits.
The PERCEPTION of the company is ultimately what matters most for investors. Someone will buy Apple stock because they PERCEIVE it as a strong, growing company whose stock price will go up, thereby giving them a profit. Conversely, when they PERCEIVE the stock is no longer poised for growth that reflects their desired profit, they will sell.
It's truly not going to be any harder than that until we have a much better grasp on chaotic systems. Until then, "analysis" like this is nonsensical, egotistical and masturbatory.
- 20 billion cash reserves currently = reduction of share price by approx. $20
- If you look at the growth curve of the past 2 years, 18-20% is too conservative. Growth cannot grow continually, but here's where soft factors play a role in hard DCF analyses. The growth prospects can assumed to rise further if the iPhone growth keeps increasing at the targeted rate of 10m for 2008 and further. As some supply channel info has shown, there's a good chance that the iPhone product palette may be broadened by Monday by iPhone nanos and, possibly, a third model like the 2.5G iPhone currently sold (apart from the much anticipated 3G model).
-current earnings are not reflecting true cash inflow, as apple has changed accounting rules to accomodate the cash inflows from iPhone and appleTV sales to a 2 year appreciation period to match prospective product life + supporting cost (OS etc.). This means, that under "retained earnings" in current statements are hidden large amounts of already earned and not appreciated earnings. As these mostly come from ATT kickbacks and device sales, they are assumed to be about 60-80% pure profit.
- A sensitivity analysis of your data shows the high fluctuation in the company value dependent on small changes in the WACC (as often with DCFs) and assumed growth. In this growth company case, it would definitely pay off to perform a proper Real Options analysis with Monte Carlo simulations instead of DCF analyses. By default, these generate a higher value than the average DCF analysis with the same assumptions, but also reflect more accurate firm values in general and per case and scenario.
www.appleinsider.com/a...
I was a commercial real estate honkey for 30 years, pretty big one at that.
We used to run these "models" all the time, Discounted Dollar Cash Flow Analysis was the term we used. I got pretty sophisticated and had models that would actually take into consideration deflation, inflation, weather, consumables, population trends...the WORKS!
Now...
Reality.
In ALL those 30 years, I can HONESTLY say, that NONE of those models were worth SQUAT, they were WORSE THAN USELESS. Every single time, "Chaos Theory" hit, and a totally unforseen variable entered in, some camel jockey in the middle east got mad at some Jews down the street, some moron politician changed the rules, this or that became unfashionable, weather sucked, too hot, too cold, inflation, deflation, you name it.
These models are USELESS.
What counts is TRENDS and INNOVATION. How do you "model in" the gizmo that Steve Jobs and Co's will whip out in the future...."OH, ONE MORE THING.." How do you count for them being IN businesses not even conceived of today, for example, a computer company selling music players? A computer company selling TELEPHONES? A computer company with the #1 RETAIL stores in the world?
So, if you want to play mental masturbation, have at these models. If you like them, HIRE ME, and I will build you modeling programs that will dazzle anyone....
BUT they will all be CRAP in the end. All of them were.
Go with the WINNING HAND, and remember, WORLD CHANGING TECHNOLOGY CANNOT be modeled, it doesn't EXIST, it cannot be factored in....and toss in a few BILLION Chinese and Indians into this blender...and who KNOW what froth will spill out?
That said I've always believed that Apple stock is close to that of a Pharmaceutical Company. To evaluate the future stock of a Pharmaceutical firm the most important thing is that do they have new drugs in the pipeline, how effective are they, what are the competitors and do they have FDA approval. For example if they've just invented a new cancer cure with no side effects how much would that be worth?
Using this illustration the 'New Drugs' for Apple is the iPhone SDK and to lesser extent Apple's other products like Movie Rentals. Will these things take off? Will the SDK be like John Doerr says the birth of new platform 'bigger than the PC', will movie rentals become like music sales for iTunes etc. John Doerr the Amazon and Google financier believes in the iPhone SDK so much he's betting a 100 million to finance iPhone Application developers.
At the start of Microsoft's rise evaluating Microsoft in a traditional manner e.g. looking at it's balance sheet etc wouldn't have been super helpful, understanding Microsoft's TECHNOLOGY and it's POTENTIAL would have been more important. When they first got hold of PC Dos, the important thing facing investors at that time was evaluating whether PC Dos would be 'the NEXT GREAT THING', the smart investor would have to imagine in 1981 what the PC revolution would be. It would have been nearly impossible to use traditional methods to calculate Msft's growth rate in 1981.
So now for Apple do you believe what John Doerr and others believe that the iPhone SDK (and other Apple mobile tech as seen in the Macbook Air) be the Next Big Revolution in Computing? If you do invest in Apple, if you don't look for something else. I think people shouldn't invest in tech companies if they don't understand at least something about technology just like they shouldn't invest in pharma companies without understanding drugs and medications.
So, despite fact shares of enron, MBIA, etc all traded very high at one time, they fell hard...and although aapl was valued single didgits after 200 crash, it is now worthw ay more. To say that a discounted cash flow analysis is worthless for a company like apple or any company is just foolish.
One more "mathematically challenged" observer.
I admit, I went to school a LONG time ago, but then $118 was considered THREE digits...has the "new math" changed that one today?
The short answer is ... If Steve Jobs surprises us Monday we will see $200. If we get what everyone is expecting or less, then you will not see $200 for at least 6-8 weeks, or more, depending on incoming iPhone sales figures.
As anyone can see from the PE ratios of any growth tech stock, or the dot.com phenomenon - nobody cares about true valuation when a stock is on fire. They just want to be on the rocket when it takes off.
This kind of anal calculation is only good for getting people to the moon, not getting rich.
The short answer is ... If Steve Jobs surprises us Monday we will see $200. If we get what everyone is expecting or less, then you will not see $200 for at least 6-8 weeks, or more, depending on incoming iPhone sales figures.
As anyone can see from the PE ratios of any growth tech stock, or the dot.com phenomenon - nobody cares about true valuation when a stock is on fire. They just want to be on the rocket when it takes off.
This kind of anal calculation is only good for getting people to the moon, not getting rich.
At Valuecruncher we use a discounted cash flow model (DCF). We are trying to assess the cash a business will produce into the future in determining a valuation today. We have put some assumptions into our analysis - our interactive tools allow you to adjust these assumptions if you disagree. You can then save and share these results. We are aiming to move valuation debate to what we consider fundamental corporate finance. We love the passion of Apple fans.
@205399
I did not state it but our model does factor in the balance sheet - including the US$19.5 billion cash and cash equivalents. We have that $22 a share of cash factored in.
@mychookie2
Our model limits the tax rate to the corporate rate in the country of domicile. We don't let people put in crazy numbers. We might down the track however.
@Bnon
Our view is that the growth rate will likely drop after 2009/10. We may be wrong with our curve - play with our assumptions. Give us your take.
@mrtaxx
Those are target valuations. Ours is based on what we think the valuation should be today. Ours is an opinion - you can play with the assumptions.
@Davewrite
I think that is a good way of thinking about AAPL. That said value still comes down to the cash that a business will generate into the future (in corporate finance anyway).
Finally
@TanToday
Wrote - "WORLD CHANGING TECHNOLOGY CANNOT be modeled"
We disagree - we think it can be modelled. But that is just us.
Thank you again everyone for the comments.
Valuecruncher
if someone tells you they have a model to predict this, let me know. i have a really famous bridge you might like to buy.
We are are valuing the cash the cash generates - that is what a DCF calculation does. The cash on the balance sheet is used to generate revenues and profits into the future - which is what we are valuing. Here is our take on valuation:
www.valuecruncher.com/...
@Scott Parker
As I said - we did value the cash on hand. I agree that modeling innovation is hard. But we think it is worth making an attempt - by looking at the potential cash flows innovation can deliver. Potentially with different scenarios factored in.
@mollytjm
Completely agree that innovation is not predictable. We are big fans of the book - The Black Swan. But from a valuation perspective - we are trying to put some numbers around that process to value companies like AAPL. Perfect - no. Worth trying - we think so.