Apple: Comparable Valuation That Will Surprise You

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About: Apple Inc. (AAPL), Includes: AMZN, BABA, FB, GOOG, GOOGL, MSFT
by: Oleh Kombaiev
Summary

Apple can only be evaluated through the prism of its growth.

Compared to FAAAMG, Apple is overvalued according to the main multiples in terms of the historical growth rates.

And Apple is overvalued in terms of the expected growth rates.

Showing no emotions, let us compare Apple (AAPL) with the companies from the FAAAMG (Facebook (FB), Amazon (AMZN), Alibaba (BABA), Microsoft (MSFT) and Alphabet/Google (GOOGL) (NASDAQ:GOOG)) list through multiples...

I believe that a direct comparison of multiples does not give a correct result because companies are always in different phases of their business cycles. Therefore, when comparing multiples, we should adjust them to the growth rate. In my calculations, I used a four-year CAGR.

So, let’s begin.

In my opinion, there are three key financial indicators: revenue, EBITDA and FCF. Let’s go over each of them.

First of all, let’s compare Apple with companies from the FAAAMG list through the EV/Revenue to growth multiple:

In this case, the implied price is $65, which is 2.5 times less than Apple’s actual share price. And the most remarkable thing is that in June the implied price exceeded $120:

If you carefully analyze the table at the top, it becomes obvious that such a cheap valuation of Apple within this multiple is due to the relatively low growth rate of the company’s revenue.

Going further.

Comparing Apple through the EV/EBITDA to growth multiple, we obtain almost the same result:

It is noteworthy that prior to the publication of the results for the last quarter, which indicated a four-year CAGR of EBITDA decline to the fifteen-year minimum, the implied price based on this multiple almost corresponded to Apple’s actual share price:

And, eventually, let’s evaluate Apple through the EV/FCF to growth multiple:

In this case, the implied price of Apple is approaching zero, just like the four-year CAGR of FCF. And what's even more interesting, the current implied price based on this multiple is minimal for the last six months:

So, it is obvious that in terms of the demonstrated growth rates of Revenue, EBITDA and FCF, Apple is practically the most expensive company from the FAAAMG list.

But maybe all this doesn’t tell the whole story, because the listed multiples are based on the historical data. But an investor usually invests not in what the company has now, but in what, in his opinion, it will have in the future. Thus, we will not stop but continue the comparative assessment of Apple. But now instead of the actual growth rates, we will consider the expected ones. That is, I suggest to compare and evaluate Apple through the P/E (forward) and P/S (forward) multiples divided by the expected annual growth rates.

This is what we get analyzing the P/S to growth (forward) multiple:

As we can see, in this case, Apple still is highly overvalued.

And, the most interesting, this is what we get after analyzing the P/E to growth (forward) multiple:

And here we are in for a surprise. Judging by this multiple, over the last six months, the implied price of Apple had persistently exceeded the actual price, but after the last adjustment of forecasts, it dropped below its level...

Bottom line

So, compared to FAAAMG, Apple is overvalued according to the main multiples both in terms of the current growth rates and in terms of the expected ones. What do those who are buying shares of this company hope for? Comments are highly welcomed.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.