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Apple: Further Growth Will Be Unjustified

Jun. 11, 2020 12:07 PM ETApple Inc. (AAPL)59 Comments
Oleh Kombaiev profile picture
Oleh Kombaiev


  • The transformation of Apple into a service company has a beneficial effect on the vision of its future.
  • Based on estimates, the company's revenue will be growing at a CAGR of 4.5% over the next 10 years.
  • However, the DCF valuation does not point to the current undervaluation of AAPL.

Eight months ago, I presented a DCF valuation of Apple (NASDAQ:NASDAQ:AAPL), which indicates that the company was undervalued by 30%. Since then, much has changed. Apple's stock price has grown by more than 50%. Bond yields has fell to historic lows. Analysts' expectations regarding AAPL's long-term growth have also changed. So, it's time to update that DCF model.

The gradual transformation of Apple into a service company has a beneficial effect on the vision of its future. At least in the last nine months, the long-term forecast for the company's revenue has improved:

October 2019:


Source: Seeking Alpha

Based on these estimates, Apple's revenue will be growing at a CAGR of 4.5% over the next 10 years. In my opinion, this is very, very not bad.

Here is the calculation of the weighted average cost of capital (OTC:WACC):

Some notes:

  • In order to calculate the market rate of return, I used values of equity risk premium (6.01%) and the current yield of UST10 as a risk-free rate (0.7%). The final indicator amounted to 6.71%. Ten months ago, this figure was 7.6%
  • I used the current value of the three-year beta coefficient. It is worth noting that Apple's Beta has also significantly decreased in recent months.
  • To calculate the Cost of Debt, I used the interest expense for 2018 and 2019 divided by the debt value for the same years.

The model assumes the operating margin of Apple will gradually decrease from the current level to 22% in a terminal year due to increased competition. Given that AAPL is turning into a service company, I find this acceptable and even optimistic:

ChartData by YCharts

The relative size of CAPEX is assumed to be 5%, which is close to the long-term average:

ChartData by YCharts

The tax rate is assumed

This article was written by

Oleh Kombaiev profile picture
Individual investor, data and financial analyst. I am interested in investment decisions based on objective methods of modeling and statistical analysis. Besides, I pay much attention to the psychological aspects of decision making.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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