Get AAPL for free - yet another opinionated valuation analysis

These days there's been endless discussion about AAPL valuation, some as usual focused on Apple and its perceived risks, some scolding everyone for even talking about valuation as it's "evidently" irrelevant, and more recently some more focused on market mechanics and manipulation. There's evidence and theory and some data to back almost any combination of reasons, be that pro or con any specific issue. Precisely because of this, most points of view end up being opinion based. I won't even point you to any article as there's been too many and I don't want to bias your research by picking my favorites (check on the list of links at the right for some of them). Or just Google "AAPL valuation" and filter by "last month" with the search tools on Google's left panel.

So here, to add my take to the "AAPL valuation is nuts" opinionated pool, I've chosen to do it without addressing any of the common issues. Yup, you read that right. I won't talk about management uncertainty or competitive forces or the broader economy or sentiment or market manipulation. There's plenty on all of that elsewhere, and usually (if you're good at parsing trolls) insightful and exhaustive discussion through those articles' comment systems.


So what's my take on this then? It's quite simple: I'll just try to predict at which point in time, through the accumulation of earnings, someone who bought AAPL today would be able to get back the full share price, as reflected in Apple's cash position. Call it trading for cash, or book-value valuation, or perhaps a simplified DCF analysis. The point is you'd essentially own AAPL for free from then on. To do that I extended my P&L model a few more years (I usually model 3 years forward on the P&L) and looked at the quarter when cash per share surpassed the current price, assuming the EPS translates directly to cash (if you believe these assumptions render the exercise worthless feel free to stop reading). Simple.

The model spat out a cash per share balance of $333.86 for the quarter ending December 26th, 2015, almost hitting Wednesday's close on the head. That's only four and a half years from now. Given today's extension of the rally to over $343 from the recent low of $310.50, I guess the following quarter ending March 26th, 2016 is now the proper timeframe, with cash per share at $352.79.

I thought I'd do a detailed description of all product lines' evolution throughout those 4-5 years: unit sales, ASPs, gross margins, etc., with lots of charts and hopefully rational justification for the assumptions involved in getting there, both for Apple and the industries in which it competes. But that turned out to be too much for one post (maybe I'll do it in a future post). It also lacked the focus I wanted for this simple argument on valuation. Suffice to say that I'm not modeling any new revolutionary product (not that I don't expect it), nor is it a 5-year projection of the current scorching growth rates, a common criticism made against those of us who've tried to bring attention to the 80% current growth valued at a 15x multiple.

Neither am I assuming an almost catastrophic drop in growth to 16% next year, like the WS consensus implies, although the model does predict that for the current product lines after 5 years. I think my modeling is conservative and this level of earnings accumulation to me seems easily achievable. I'd say I'm 90% confident $350/shr in cash would happen within the next 5 years, if not a year earlier. Obviously you'd have to account for ROI on any acquisitions and/or investments (accounting of which would be impractical) to verify that claim, so it will most likely end up being just a what-if exercise.

So, what I thought I'd focus on for this post is a description of the financial picture for AAPL at that point in time (especially looking forward roughly a year from there) and highlight some comparisons with the current state of events.

Without further ado, here's my revenue, EPS, and cash on hand "estimates" for FY 2015 and 2016, the y/y growth rates, and compared to the estimated FY 2011 figures. I also include a similar valuation as the current one, by applying a multiple of 10x to EPS, plus cash, just for reference because I'm not going to argue against a higher multiple.

Metric        FY 2011  FY 2015  FY 2016  --- CAGR ---
------------  -------  -------  -------  (5yr)  (y/y)
Revenue ($b)   108.36   272.31   313.92  23.7%  15.3%
EPS ($)         27.75    78.92    91.09  26.8%  15.4%
Cash/shr ($)    84.79   310.24   397.03  36.2%  28.0%
Value* ($)     362.26  1099.48  1307.98  29.3%  19.0%

*Value computed as 10x EPS, plus cash.

I'd like to clarify once again, this $1308 is not a 5-year price target for AAPL that I'm putting out. I would expect many things to change this forecast over the next few years. Also, I suspect that if my expectations for the following year or two come through, that the market will pay a higher multiple than 10x excluding cash. What this is, though, is a thought experiment on how soon could one get AAPL "for free" (obviously a figure of speech since Apple isn't currently paying any dividends) if things kept going the way I see them going now, and what if the market paid then the current ridiculously low valuation for the business (forward-looking growth of 15-16%, the conservative scenario I see 5 years down the road for the current product lines, is indeed what WS is expecting for next year).

To illustrate things a bit further, I'll highlight some achievements for the 2015 calendar year:

- 235m iPhones sold (I believe Gartner predicted 1.1 billion smartphones industry-wide).
- 126m iPads sold (compared to 38m in calendar 2011).
- 37m Macs sold (compared to nearly 18m in calendar 2011).
- 347m PCs sold worldwide (excludes servers) giving Mac a 10.7% share.
- More than 850m and 400m cumulative iPhones and iPads sold, respectively.
- More than 800m iOS installed base (about 250m by the end of this year).
- Suppliers get $167b through Apple's COGS (compared to nearly $70b this year).
- Almost $20b in operating expenses (compared to almost $11b this year).
- Nearly a billion shares outstanding (945m by the end of this year).


Of course, the elephant in the room for this exercise is that I'm not modeling anything new from Apple. Yet we all know Apple is right now thinking hard and developing prototypes on the next big thing, whatever it is. Maybe another device, maybe the TV that Munster dreams about, maybe a revolutionary service or something completely out of left field like a brilliant business model shift or investment/acquisition or cost savings or some other new paradigm. I have no idea what the next big thing could be, and thus I can't model any of it. I do know there will be something, maybe it's merely incremental and only requires slight adjustments to my model, or maybe it's an order of magnitude change.

On top of this, the market can go through many tribulations in the next five years so assuming things will be the same as now is at best naive. Broader economic risks are real, and retail investors (be that on their own or through their pension funds) are as turned off by market shenanigans as ever.

In any case, keep all that in mind and again don't take these as my real forecasts for 2015, but as a baseline. Hope you find good use of them, and please feel free to question them and knock them up or down in comments below.

Update: Above I've said I wouldn't link to any of the articles talking about AAPL valuation. However, a commenter below has pointed out a forum (one which I don't frequent) thread by Nicolae Mihalache (one of the 10 or so independent analysts participating in PED's smackdowns), in which he tries a similar analysis as the one here. He did one here with realistic estimates, and again here with WS analysts expectations. What impressed me after a quick look of his "realistic" table is how relatively close we are in our projections. Perhaps after 5 years I'm a year behind Nicu's, but this is remarkably close for these types of projections. Thanks for the link anon.