I am a newcomer to analyzing AAPL so the comments presented herein are from a perceptive of somebody trying to decide whether AAPL is an attractive stock to purchase at this price. Whilst trying to get an insight into the question above on AAPL's valuation, I undertook a rough scenario analysis of AAPL's future cashflows based upon the views prevalent in the market. I posted my analysis on my blog last weekend (before Tuesday's results).
I developed 3 scenarios namely - Apple Loses Its Cool, Apple Matures Gracefully, and Apple Keeps on Rockin. Each of these scenarios contains multiple assumptions on product units sold, average revenue per product, gross and net margins. The detail behind the assumptions of each scenario is contained in the post on my blog. A graphical summary of each scenario is below:
Following Q2 results and the changes in analysts short term revenue and gross margin estimates, the scenarios may need to be updated but the overall result will likely change little.
Based upon differing discount rates of 2.5% to 10% and differing termination multiples for each scenario, I determined a range of valuations and implied PE multiples as per the exhibit below:
The valuations above are represented in the graph below from a base share price of $400:
So in attempting to answer the question posed in this post, my view is that given the risk profile of Apple's sector, a discount rate of between 5% and 10% should be applied to valuing AAPL. This view is driven by my belief that current corporate risk premia have been artificially distorted by global macro monetary policies and thereby makes the use of an estimated WACC applicable to AAPL today (i.e for a AA corporate credit) in a cashflow analysis imprudent. If you accept that premise (and many may not), then the upside and downside dynamics as presented herein for Apple at $400 are passable but nothing to shout about. Continued success (albeit at much reduced growth rates) in the iPad and iPhone markets - given the maturing market in developed jurisdictions, increasing competition in all markets and AAPL's reducing (gross and net) margins in these core products - offers unimpressive upside. A mitigant to this dynamic is, that with a relatively limited downside of approx 30%, the current price offers a reasonable wager on AAPL's ability to innovate in new product categories in the medium term. However AAPL looks range bound until the market gets further insight on the potential of the new product categories and accepts that Q3 and Q4 are likely to confirm AAPL's reducing gross margins. Therefore a strategy of waiting on the sidelines for such insight, or small purchases to average in around (or preferably below) $400, as future news on new product categories come out over the next 6 to 9 months look the optimal strategies for AAPL.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.