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Is Apple As Good Of A Buy Today As It Was In 2013?

|About: Apple Inc. (AAPL)

Summary

This is a rough valuation analysis of Apple. It's probably most useful for someone who hasn't looked at Apple recently.

If you had bought Apple at the bottom in 2013, cash plus profits would cover your investment cost after just 4.5 years.

If you buy Apple today, it will probably take 6 to 10 years for cash plus profits to cover your investment cost.

At the current price, I'm happy to have Apple as 7% of my portfolio. I would buy more below $90 and sell above $150 in the next 12 months.

Note: The numbers in this article are for the whole company instead of on a per share basis since the share count has decreased a lot since 2013. This keeps the math simple.

Apple (NASDAQ:AAPL) stock is up 95% since the bottom in April 2013 ($109 today vs. $56 then). Is Apple as good of a buy today as it was then? Apple has a lot of cash, which makes valuing it slightly tricky. Let me walk you through how I value Apple.

Apple's Cash

Asymco

Source: Horace Dediu (Asymco) (https://twitter.com/asymco/status/764156168059092992)

 

August 2016 (billions)

Market Cap:

$590

Cash:

$232

Estimated Repatriation Taxes:

$86

Debt:

$85

Net Cash

232 - 85 = $147

Net Cash - Repatriation Taxes:

147 - 86 = $61

If you bought all of Apple today, it would come with $232 billion of cash, which sounds great! Who wouldn't want $232 billion of cash? But it also comes with $85 billion of debt. If you used the cash to pay off the debt, you would be left with $147 billion. Let's call this the net cash. The net cash is a better representation of what you would actually own if you bought Apple today.

However, $215 billion of Apple's cash is held outside of the USA. To bring that international cash back to the USA, you would have to pay a 40% repatriation tax. If you repatriate all $215 billion of international cash, you would lose $86 billion of it to taxes! That means if you bought Apple today, brought all of the cash back to the USA then paid off the debt ($232 - $86 - $85 = $61), you would only be left with $61 billion of cash in your pocket! It's still a lot of money, but not nearly as much as the $232 billion you started with.

As you can see, repatriating international cash greatly decreases the value of it. If you want to keep more of that value, you could do what Apple has already been doing: borrow money and use the international cash to pay the debt. That's why Apple has $85 billion of debt even though it has plenty of cash. Paying a few percent a year on debt is much better than paying 40% in taxes immediately.

How should you value the cash Apple has? If you wanted as much cash as possible in your pocket right away, you could end up with as little as $61 billion. If you're not so impatient, you could probably get most of the international cash back to the USA over time by issuing debt. That means the true value of Apple's cash should be close to the net cash value of $147 billion. True value is probably slightly less since you will have to pay interest on the debt you issue, but to keep things simple, let's say if you bought Apple today you would get $147 billion of net cash.

Return Since 2013 Bottom

Present Net Cash

$147 billion

Dividends and Buybacks Since April 2013

$167 billion

Estimated Profits For Next 5 Quarters

$56 billion

Total

$370 billion

   

Market Cap April 2013:

$370 billion

In April 2013, the market capitalization for Apple reached a low of $370 billion. If you bought all of Apple at that time for $370 billion, you would have $147 billion of net cash today, which is 40% of the original purchase price. Apple has returned $167 billion of cash to shareholders through dividends and stock buybacks since April 2013. If you had owned all of Apple, all $167 billion would have gone to you. The cash returned plus the net cash still held means Apple has paid back 85% ($167 + $147 = $314) of the original purchase price after just 3.25 years!

In the last 12 months, Apple earned $48 billion of profits. Apple will probably earn a little less in the next 12 months, say $45 billion. At that rate, it will take 1.25 years for Apple's profits to cover the remaining $56 billion of your original $370 purchase price. ($167 + $147 + $45*1.25 = $370)

To put it another way, if you had bought Apple for $370 billion in April 2013, Apple's cash plus profits will cover the cost of your purchase by October 2017. That's just 4.5 years after your initial purchase! Any profits Apple generates after that will be a pure gain for you. That's probably hundreds of billions of dollars of gains since Apple will probably continue to be a highly profitable company for many years to come. I'm not aware of a better investment you could have made in 2013, or even in the past 5 years.

What About The Other Assets?

The above analysis only considered the cash Apple owns or generates. What about the other assets Apple has? I deliberately left those out since the other assets are small relative to the cash. Apple has about $25 billion of property, plant, and equipment. That would be a lot for most other companies, but $25 billion is only 4% of Apple's market cap today.

Apple's most valuable assets are the employees who create the products. Employees don't appear on the balance sheet since Apple doesn't own them. Employees are free to leave if they wish. It's up to management to maintain the work environment that keeps these valuable employees at Apple.

I don't see much risk of valuable employees leaving anytime soon. Apple is #25 on Glassdoor's list of best places to work. Most critical employees working on products wouldn't be able to do the same things if they went to a different company. That's why Apple has a lot of high-level product employees that have been there a long time. Most critical employees are relatively young, so they shouldn't be inclined to retire in the next few years. Although many less critical employees do move on after spending a few years with Apple, there are many qualified people eager to take their place. Perhaps Apple's greatest asset is management's skill for getting people to work together to create great products for their customers. As long as that persists, Apple will continue to be a successful company that the best employees will want to work for.

Is Apple A Good Buy Today?

We've seen that Apple was a great buy in 2013. The stock price has roughly doubled, but profits and cash on the balance sheet have also increased. Is Apple still a good buy today?

The market cap for Apple today is $590 billion. As I discussed at the beginning of the article, buying Apple today comes with about $147 billion of net cash. How long will it take to get back the remaining $443 billion ($590 - $147 = $443) of your investment if you bought Apple today? The answer depends on Apple's future profits. I've created a table for three different scenarios below.

Cost

Net Cash

Profits First Year

Profit Growth Rate

Years to Cover Cost

$590 billion

$147 billion

$45 billion

0% per year

10 years

$590 billion

$147 billion

$45 billion

10% per year

7.25 years

$590 billion

$147 billion

$45 billion

20% per year

6 years

I considered profit growth rates from 0% to 20% per year. Given the size of Apple's business, I think it's very likely the actual profits will fall somewhere within this range. As you can see, it could take as little as 6 years to cover the cost of your investment today, or as long as 10 years. I believe a growth rate of 10% per year is the most realistic. At 10% per year, it would take about 7 years to cover your cost. Once your cost is covered, any profits Apple generates after that would be pure gains for you.

Is this a good deal? I think there's a good chance Apple will be a strong, profitable company for much longer than 7 years. So yes, I do think buying Apple today is a pretty good deal. But seven years is also a rather long time to wait. Technology will change a lot between now and then. It's possible Apple won't be as strong seven years from now as it is today. In 2013, Apple's iPhone still had a lot of room to grow. I expect iPhone sales will grow slowly on average from now on since most of the people who want an iPhone can already buy one.

Apple was an incredibly good buy in 2013, and I bought a lot of Apple shares in 2012 and 2013. Today, I believe Apple is a good buy, not a great buy. Apple is still one of my largest positions at about 7% of my total portfolio, but it used to be over 30%. For Apple to be as good of a buy as it was in 2013, the share price would have to drop to $75 a share. At that price, your costs would be covered by Apple's cash and profits in 4.5 years assuming 10% per year profit growth.

Apple's share price could drop significantly for a number of reasons. The economy could get worse. Financial volatility could trigger a stock market panic. Sales of the next iPhone model could disappoint investors. I would buy more share of Apple if the price drops below $90 a share in the next 12 months. If the price climbs higher, I would prefer to hold on to my shares since I believe the long-term outlook for Apple is good. If the price goes above $150 within the next 12 months, I will sell some shares.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.