Apple: Further Growth Will Be Unjustified

Summary

• 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:

Now:

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:

Data by YCharts

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

Data by YCharts

The tax rate is assumed at the level of 25%.

And finally here is the model itself:

PDF version

The DCF-based target price of Apple's shares is $316, offering 10% downwards.

Bottom line

DCF modeling gives a rough idea of a company's current rational price based on its development trends, the situation in the debt market and current volatility. But the main advantage of this method is that it does not allow subjectively interpreting the result.

In fact, the DCF model indicates that Apple is approximately fairly priced by the market now. But this means that the increase in the company's share price offset the changes that have occurred in the internal and external environment over the past nine months. Of course, in the face of this crazy market, Apple's price may continue to rise. But in the context of this approach, it will be unjustified growth.

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.