Apple: Valuation From A Value Investor

Here’s some controversy coming your way. A stock price valuation of Apple (AAPL) by a value investor.

Warning: if you love Apple, I mean really l.o.v.e. AAPL, this may not be what you want to hear.

The Apple Story…

Apple is consistently a Wall Street darling. The company is covered by 35 analysts, it’s products, services and CEO is constantly in the news. Which is why I don’t believe in the “it is misunderstood” theory by so many investors.

Think of 35 analysts as one full classroom of elite students doing the same project and trying to come up with different views and opinions.

I don’t bother with efficient markets but in this case, I would believe that the market as well as the 35 analysts couldn’t all be missing out on revenue generation and where it will be coming from in the future. I’ll leave that to someone who’s good with the magic 8 ball.

Moving on..

Apple Numbers

There is no doubt in my mind that AAPL is a fantastic business. It’s moat is huge, products fantastic, innovation outstanding and execution breathtaking. The same goes for it’s financial statements.

If you take a look at Apple’s financial statements, it is so healthy you would never notice there was a recession in 2008.

• FCF growth is on steroids
• Gross, operating, net margins constantly increasing
• Management is able to make 20c off every $1 of cash invested. Now that is amazing.
• Every $1 of sales is converted to 15c of FCF
• Earnings growth is equally impressive

Check out the financial statements of the past 10 years and 20 quarters for AAPL.

(AAPL 10 Year Financial and 20 Quarterly Financial Statements)

AAPL Financial Statements Old School Value

So AAPL is a great investment right? Not for a value investor.

AAPL Intrinsic Value

When I previously calculated the intrinsic value of AAPL during the peak of the bull market,  I used two scenarios. One was a realistic growth rate of 14.3% and the other was a euphoric rate that many people wanted me to use which was 22%.  The intrinsic value came out to approximately $130 and $190 respectively.

Now that things have settled down substantially, the 14.3% FCF growth rate was actually the smart one to use. In this fairly valued market, using 15% FCF growth rate is still the most realistic figure.

Also, since 2008 was hard for every company, I’ll readjust the FCF of AAPL to balance out the one year recession. With a discount rate of 9% and growth rate of 15% the intrinsic value comes out to $146.22. Fairly valued as the current price is about 13% above my estimate.

Is Apple a Buy?

Buffett has said that it is much better to buy a good company at a fair price rather than a fair company at a good price, but my performance to date and results from screens and tests I’ve performed show that maybe Buffett got it backwards.

AAPL may be a great company, but paying fair value for the business will not produce the out-sized returns that you are probably looking for. For a long term passive portfolio, it will probably work out well, but to compound your money at a better rate, there are still better opportunities than its current price.

From it’s lows, AAPL is up 111%. The stocks I mentioned on this blog are up just as much, if not further, and have far for upside potential.

As a company AAPL is definitely awesome. As an investment, the price does not have enough of a margin of safety to preserve capital in the case there is an another unexpected disaster.

Disclosure

Previously held AAPL. No positions at time of writing.

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Comment by jbelkin

2009-08-14 00:51:28

Are you calculating that Apple is counting iphone sales cash flow into future quarters even though they are collecting the revenue as it comes in … and they are sitting on $32 billion in cash?

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Comment by Jae Jun

2009-08-14 00:57:04

Im not calculating based on earnings. All calculation is based on FCF.

And yes I know they have $32 billion in cash. Everyone does.

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