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Valuing Apple By The Sum Of Its Products

|Includes: AAPL, Fitbit, Inc. (FIT), P

Summary

Market is missing the potential of Apple's product lineup.

Apple trades at a 50% discount to the Sum Of Its Products when they are valued as individual companies.

Apple's seamless integration of these products should demand a premium - not a discount.

With the release of Apple Music and the Apple Watch, Apple (NASDAQ:AAPL) has created two new exciting products which are expected to contribute $2.25 billion and $5.25 billion respectively to Apple's bottom line in 2016. The market's response has been somewhat muted to both of these products, but what if they were each trading as separate companies?

While working on my latest article which dealt with estimating the impact of Apple Music on Apple's earnings, I was given an idea: What would Apple be worth if the market treated each of its products the way it treats direct competitors? Here's what I found:

First, the following is my revenue estimate for Apple's product lineup into FY17. I will be referencing these revenue estimates and applying a universal 22% net margin to estimate earnings derived from each product.


(Source: The Prosperity Active Yield Fund)

Apple Watch as a Standalone Company:

FitBit (NYSE:FIT) recently went public, trading under the ticker FIT. It trades at a Forward P/E multiple of over 46. What if the market valued Apple Watch as it does FitBit?

Estimated FY2016 Apple Watch Earnings: $5.25 billion
Apple Watch "value" using 46x FY2016 Earnings: $241 billion.


Apple Music as a Standalone Company:

Pandora (NYSE:P) is publicly traded with a Forward P/E of 34.
Spotify, at an $8.4 billion valuation, is valued at 6.5 times its sales of $1.3 billion.

If Apple Music were to trade at Spotify's 6.5x Price-to-Sales multiple, it would be worth an estimated $55.38 billion, and if Apple Music were to trade at Pandora's 34x Forward P/E multiple, it would be worth an estimated $76.5 billion.

As a standalone company, then, Apple Music would - arguably - be worth between $55 billion and $75 billion dollars.


The iPhone as a Standalone Company:

Apple's iPhone has seen annualized revenue growth of 25% since 2012. Accordingly a 20 times FY16 P/E multiple seems appropriate.

Estimated FY2016 iPhone Earnings: $33.66 billion
iPhone "value" using 20x FY2016 Earnings: $673 billion


The iPad as a Standalone Company:

Given that iPad revenue is expected to decline from FY14 to FY15, a Steady Sate Valuation (SSV) seems appropriate. Typically, SSV is calculated using Net Operating Profit After Taxes (NOPAT) divided by the Weighted Average Cost of Capital (OTC:WACC), but given that Apple's WACC is an absurdly low 5.85%, that would give a P/E multiple of 17. I decided instead to use 10 times FY2016 Earnings.

Estimated FY2016 iPad Earnings: $5.4 billion
iPad "value" using 10x FY2016 Earnings: $54 billion


The Mac as a Standalone Company:

Similar to the iPad, Mac revenue is expected to flatten. Accordingly, I decided to use a 10 times FY2016 Earnings multiple.

Estimated FY2016 Mac Earnings: $5.94 billion
Mac "value" using 10x FY2016 Earnings: $59.4 billion


Apple Pay as a Standalone Company:

Unlike the Mac and the iPad, Apple Pay growth expectations are enormous. Apple Pay revenue is expected to grow 800% from $250 million in 2015 to $2 billion in 2017. Accordingly, a forward multiple of 25 times FY2016 Earnings is appropriate.

Estimated FY2016 Apple Pay Earnings: $0.275 billion
Apple Pay "value" using 25x FY2016 Earnings: $6.88 billion


Apple's "Other Business" as a Standalone Company:

Apple's "Other" Business consists of its accessories business, iTunes purchases, Apple TV, and more. It has consistently brought in $20 billion or more since 2012. I decided to apply the SSV 10x FY2016 multiple.

Estimated FY2016 Other Business Earnings: $6.38 billion
Other Business "value" using 10x FY2016 Earnings: $63.8 billion


Apple's Cash Holding

I valued Apple's Cash Holding at par.

Apple's Cash Holding: $193.54 billion


SOTP (Sum of the Products)

Apple Watch: $241 billion
Apple Music: $55-$75 billion
iPhone: $673 billion
iPad: $54 billion
Mac: $59.4 billion
Apple Pay: $6.88 billion
Other Business: $63.8 billion
Cash Holding: $193.54 billion

Total: $1.36 trillion, or $234 per Share.


Takeaway:

Obviously, this was just a fun exercise. In no way am I suggesting that Apple's products could draw those values as individual companies. A key reason why Apple's products are valuable is because of how well they work TOGETHER. The Apple ecosystem is arguably the strongest corporate ecosystem in the world, and separating the products would be undoubtedly counterproductive. That said, it's obvious that the market is placing a significant discount on Apple's products versus the competitors - something that I believe to be unwarranted.

If Apple were to be valued at $1.36 trillion, that would be the equivalent of 22 times FY2016 earnings. At a time when the average stock in the S&P 500 is trading at 16 times FY16 Earnings, a premium of that nature wouldn't be unusual for a company whose FY17 EPS is expected to be twice that of FY14. And let's not forget, Carl Icahn thinks Apple is worth $240.

-Adam Janes, The Prosperity Active Yield Fund.

Disclosure: The Prosperity Active Yield Fund is long AAPL

Disclosure: I am/we are long AAPL.