Why Apple (AAPL) Is Not a Good Value
October 12th, 2007 by 
James Cullen
Tom’s article on valuing the QQQQ drew several comments about his target prices, particularly on Apple (AAPL), a favorite momentum play for traders of late. One of the more polite comments asked how a $131 fair value price for AAPL was obtained. The simple answer is “through discounted cash flow (DCF) valuation,” but what does that really mean?
DCF valuation is my preferred way to value a business because the underlying principle is that a company (or stock) is worth the present value of future cash flows that can be taken out from it. There are a few parts that I’ll walk through in great detail to show how the AAPL price was arrived at - free cash flow, discount rate, future growth projections, and terminal/exit multiple.
For Apple, the initial (t=0) free cash flow is $4.15 billion, which is simply the company’s free cash flow in the last four quarters. No non-recurring items are readily apparent, so that figure is simply taken as-is. The next question that needs answering is “how fast will Apple grow FCF?”
There are two ways to do this: create your own estimate of Apple’s cash flow growth, or do a reverse engineering of the current price to see what the implied growth rate is and make a determination of its probability of being accurate. I prefer the latter because it gives a target to adjust growth numbers to, so while it isn’t the most academic exercise it is nonetheless more practical. Apple’s current market cap is $141 billion, or $162 per share.
So I’ll fit the growth curve to that, which means taking into account analyst estimates for 34% growth in the current quarter (I’ll put that as my full year-one growth even though growth estimates for the next quarter are 18.5%), and for years two through five I’ll use 22.6%, which is the consensus five-year annualized growth forecast. I realize that I’m overshooting here, but this will be my “aggressive” assumption. Coming off that five year period, I should ratchet down expectations; a “bridge year” where the company transitions into a slower-growing company is appropriate, and I’ll assume 15% growth for that year (year six, for those scoring at home). Keep in mind, this entire time the net growth figures are being discounted back to present, but we’ll get to that later. Now we have Apple, the “maturing firm,” as we move into the second half of 2013. For the next two years, let’s say Apple grows at 10% per year, with 9% the year after that and 8% in the following year - solid, but not phenomenal, rates. There are two issues left: the proper discount rate, as well as the terminal (or exit) multiple, which is the inverse of the discount rate.
For the discount rate here, I’ll use the Capital Asset Pricing Model (CAPM), which - let me hack a rather elegant theory apart here - basically states that the expected return of an asset is equal to the risk-free rate of return, plus some additional return that equals the risk premium multiplied by the risk of the asset. The average yield of the 1– and 3-month Treasury Bills is about 4%, and I get an expected market return of about 6.6% using the S&P 500 earnings yield and dividend. With AAPL’s beta of 2.21, the CAPM gives an expected return of 9.49%. Take it for what you will, that is what I’m using for the time. Every year’s cash flow is discounted at the appropriately compounded multiple of 9.49%, and the last year’s cash flow is multiplied by 1/9.49% to give a terminal multiple of 10.53, which (as the name implies) is multiplied by the out-year cash flow and discounted back to present, along with the net current assets Apple has (carried on the books right now at $10.5 billion).
All of that nets out a value of $166 billion for the firm, about 18% above the current market cap for a value of $191.09/share. I consider this an aggressive set of assumptions because:
1. Growth estimates seem high, namely in the intermediate years
2. I think 9.49% is a very low discount rate to use for a stock like AAPL; and while discount rates are very subjective I think it is safe to say most people aren’t in AAPL for a 9.5% annual gain.
The latter issue is strictly my view and has much to do with the difficulty of measuring “risk” in financial circles - I don’t think that beta is close to perfect, but it has to suffice for the above example. On the former, however…
I realize Apple has a great growth story right now; I merely think the extent of the story is greatly over-hyped. Yes, the iPod is a nifty device from everything I hear, but that is Apple’s only real successful product launch in their twenty-five years in business. The iPhone hadn’t been out three months when they had to cut the price to move units - it is far too early to call the iPhone a success, but I digress… focus on the quantitative side of things. If Apple maintains the same FCF margins it does right now throughout this scenario (a big assumption, as margins usually come down), Apple will need to have 5x the sales next decade compared to right now. Sales in the last four quarters amounted to $22.6 billion, giving a target of $112 billion in sales. How impressive would it be for Apple to accomplish that feat? In the last ten years, Hewlett-Packard (HPQ) has gone from $42.9 billion in sales to $100.5 billion in sales; starting with nearly twice the base amount to work with compared to Apple, Hewlett-Packard fell short of the amount Apple needs to get to. Very few people realize what an immense and impressive feat $100 billion in sales would be; there are 21 publicly traded companies with that amount or greater. And yet, the implied assumption for people who think AAPL has moderate upside is that Apple will quintuple sales to break that mark in slightly under a decade.
So, what does one buy stocks for? Generally, I think the answer would be along the lines of what Charlie Munger has said: “All intelligent investing is value investing - to acquire more than you are paying for.” In the case of AAPL, I don’t believe you are acquiring more than you are paying for unless one uses extremely aggressive assumptions, and what is the point of purchasing something on the most optimistic of forecasts?
As for the arrival of the $131 fair value; such a valuation uses a 12% discount rate, 34% front-year earnings growth followed by 19% annually through the fifth year, a bridge year growth rate of 15%, followed by 10% annualized growth for the next four years. I now see that in the initial estimate I did a bit of rounding, so this valuation scenario works out to a value of $130.33, or 20% less than Apple’s last closing price. Given that one wants to buy a stock at a discount of somewhere between 30-40%, I’d very much like to see how others are arriving at the conclusion that AAPL is a great value right now.
Subscribe to our feed:
See more AAPL, James Cullen, Large Caps, Short Stocks, Tech | 
October 12th, 2007 at 12:42 pm
awesome post, thanks a lot.
October 12th, 2007 at 1:36 pm
Nice article! I agree with the fair value of $130.33. But, I am more worried about the risk of disruptive forces like Google phone, cheap ipods stealing Apple’s revenue stream in the future. Considering that, I will buy only at 60% of fair value, that is $78.
October 12th, 2007 at 2:01 pm
Finally—-hope for a brighter generation than this one. Bravo! And you back your work up with FACTS!! Isn’t that a breath of fresh air! You guys/gals are great—keep it up. Apple is a good company, but it’s stock is way overhyped….I agree with the previous post—-Apple around $80 is a good value.
October 12th, 2007 at 2:17 pm
You seriously underestimate future growth of Apple using an irrelevant model. EPS growth was 70% yoy last quarter without any contribution from iphone sales or residuals. Organic expansion of the imac segment was largely responsible. With only 4-5% of market share, Apple has much more room to grow. You also ignore the expansion of iphone into large foreign markets and the brimming product pipeline. In other words, your assumptions are flawed and your CAPM model irrelevant. By the way, isn’t that about the most conservative model you could find?…Despite the obvious problems with your analysis from a fundamental perspective, I suspect the market will prove you to be erroneous in your valuation of Apple for years to come.
October 12th, 2007 at 2:23 pm
[...] (AAPL) makes up 8.98% of the QQQQ. My valuation places AAPL as being worth $131/share, so with AAPL currently trading near $168, the stock looks overvalued by about [...]
October 12th, 2007 at 2:32 pm
We need an Orange company then we could compare apples to oranges. Just about every stock out there is overvalued big time, Someone will be left holding the bag. Waiting for history to repeat itself, looking for the crash of 07 been 10 years. We need a good 600 point drop. Everything that goes up must come down.
October 12th, 2007 at 2:33 pm
Bill,
Did you even read what I wrote, or just draw your own conclusion from the title? In my upside scenario with the $190 valuation, I show that happens if Apple quintuples sales in a decade to over $110 billion annually. Do you have any respect for that amount and what it would take to get there coming from $20 billion in sales? Apparently not…
October 12th, 2007 at 3:53 pm
hmm.. you forgot about debt. maybe go back to college?
October 12th, 2007 at 4:04 pm
Ok, so you’re just out of college and now you are trying to apply all those neat textbook formulas to real-life stocks?? Not going to work, my friend. Fair values mean nothing to growth stocks. S&P has several current “strong buys” recommended stocks that appear to be “overvalued” 10-30% by using strictly quantitative models. Means nothing. This model would cause you to lose on many many great stock runs of the past including GOOG, AAPL, UA, CROX, etc
October 12th, 2007 at 4:24 pm
Anon 2,
First off, what debt? Apple has no long-term debt on their books. Second, I clearly stated that I added “net current assets” - that would be current assets less all liabilities. Maybe, after passing reading comprehension, I’ll try to pull some strings and get you into Boston College.
Addison,
I’m not out of college - still very much here. If you’d like to get me a job working buy-side somewhere, I’d jump for it… then again, you seem less than thrilled with my analysis.
Why do the guesswork thing with “growth stocks” to which you feel no fair value applies? There is certainly a fair value for them, people just don’t recognize that until the stock is no longer a growth stock… which is when everyone learns that valuation does matter. Play on as you will…
October 12th, 2007 at 4:38 pm
I agree with Frank, this is an overvalued market right now, the small cap leaders make new highs everyday. As far as Apple, I got to agree with the guy who said a DCF model for big-cap glamour stocks like Apple or Google rarely has much relation to how they actually trade. That said, it’s still a great way to value other stocks.
October 12th, 2007 at 4:39 pm
The biggest problem with your analysis is your assumption that Apple’s margins will stay the same (which you think is “optimistic”). Has Apple’s earnings growth so far stayed similar to its revenue growth? Absolutely not. Just in the last nine months, its revenue growth was near 23% whereas its operating expenses increased 15%. Gross margin leaped from 29% to 34%. While the gross margin may trend lower (or higher, as Apple’s buying power and manufacturing efficiency due to economies of scale increases), I think it is ridiculous to assume that Apple’s operating margin is going to stay the same in the next five years, ESPECIALLY if one were to give it 22.5% average REVENUE growh rate for the next five years. Unless you have a reason to think that Apple’s operating expenses need to grow a lot faster than now, your earnings growth assumption seems very low. I for one actually think its opex growth will slow down in the next five years to low double digits, mostly because of the law of large numbers.
October 12th, 2007 at 6:20 pm
Anon 3,
It might have been Taleb who said that one primary flaw of people is that they extrapolate a very short time series too far into the future. If not, I said it here.
To apply the “law of large numbers” to operating expense growth while completely ignoring the same when it comes to revenue growth demonstrates either an ignorance of the principle, or scarily selective application of it. I just looked at the multi-year trend in operating margins for several big tech companies, and they almost exclusively tend/trend down.
Ah, but Apple is different… right. Sorry, I forgot that.
NB: Many people are willing to say I am far too conservative in my estimates, yet nobody will address the HPQ example or touch the $110 billion in sales figure.
October 12th, 2007 at 7:31 pm
like to see a dcf for google and amzn to do sanity check on apple analysis. if all three are below their current mkt price, then what’s up. a key problem here is that using dcf for a steel business versus apple and google is a good basis for comparison but does not factor in the “genius” factor and the steady boring growth of the steel industry (until China and india began gobbling up steel…) versus the clear volatility of the future markets faced by apple and google. hence the limits of relying on dcf. we would like a simple formula to describe the future; little bit more complicated. so don’t be lazy. factor in a few mpore difficult variables.
October 12th, 2007 at 8:25 pm
Why don’t you apply this analysis to Apple’s numbers from 2 and 3 years ago–and see how well it holds up to what has actually happened? Pretend it is 2004 or 2005 and you are trying to get a handle on Apple and its value. I understand DCF analysis and I also understand that this company is underestimated because analysts are looking in a rear view mirror.
What has happened is a remarkable vision of presenting products that meet people’s entertainment and information needs in a simplified, streamlined intuitive fashion. What has happened is that Apple delivers on that vision. What has happened is that Apple has entered new markets–like cell phones. What has happened is that Apple does a few things extremely well and is experiencing tremendous growth. Wall Street has not adequately forecasted Apple’s growth this year and is still playing catch up.
Do you really think Apple will only deliver earnings in the mid $4 range next year? What would drive those earnings higher?
Do you think Apple won’t introduce a 3G iphone within the next few months? Do you understand the demand for a 3G Apple iphone? Do you understand the accounting Apple is doing with the iphone and its cash generating abilities? Have you considered what contribution to the bottom line Apple’s growing cash levels will make to its bottom line–just by being invested and earning some interest?
Whast about other markets Apple may enter–they have a tremendous amount of cash. What about the gaming market? A very lucrative market….but it is not in today’s valuation.
What DCF overlooks is where uncommon strategic thinking and execution can take a company. DCF will work for a Kraft Foods or other type of staid company. DCF for a growth company…hard to use because who last year would have bought into estimating that Apple would grow its earnings over 65% for FY 2007?
October 12th, 2007 at 9:24 pm
You make some key assumptions that are not valid,
1. You assume the current AAPL’s beta of 2.21 applies in later years when revenue growth has slowed. For later years your model should apply a much lower beta when calculating discounted cash flow. That is a simple correction.
2. You assume 5x growth in sales will be difficult over the next decade and then compare with HP. The flaw in that logic is:
- HP sales have largely grown with growth of the technology sector. Check out the growth of others in the same sector to confirm this. APPL can sustain much higher sales growth as it displaces others in the technology sector. For example, APPL share of the PC market is growing much faster than the PC market, and given AAPL’s current market share around 6%, there are many years of 20%+ annual growth ahead just to get to even with a company like DELL or HP.
- The same logic applies with the iPhone where APPL starts with a small base and can be expected to take market share from current leaders.
- I would suggest as others have done that run your model GOOGLE using 2003 data as your staring poing and MSFT assuming 1990 as your starting point. Your model would have missed some of the best growth stocks over thaat period.
October 13th, 2007 at 1:56 am
your analysis is too forward looking. Think about that statement long and hard.
October 13th, 2007 at 5:31 am
Nowhere in your statements have you mentioned anything the iMac or the Leopard OS. Proves how narrow-minded you are. I have never owned any Apple products before but I’m definitely getting the iMac with the new OS in it for x’mas. Not to mention, my friends are getting the iMac too. Microsoft is destroying themselves with their licensing. Watch the Leopard to run fast and furious.
October 13th, 2007 at 5:35 am
I agree with Addison and his post at #9.
Why don’t you apply your textbook theories onto BIDU (Baidu.com)?
I bought it at 190 and I added more shares even at $305 yesterday. Trading at 200x earnings and 80x next year, how’s that to your model?
You’re still young and studying at college. Just focus on school for now, you’re not ready for the markets yet.
October 13th, 2007 at 7:48 am
When you talk about disruptive technologies or trail blazer products, when you talk about premium pricing based on branding, it throws a dent to all your analysis because all of these factors are not factored into DCF analysis. If they are, they are highly speculative. (remember google when it ipo’d in 2004?) Of course with DCF you realize how the whole valuation is extremely sensitive to variations in growth rates and discount rates. Just like zazzy said, why don’t you back test your strategy 4-5 years ago to verify the veracity of your statements…
Oh you would say the Iphone was not available then, we didn’t know apple was going to release that so it was tough factoring it into the model, or again the “halo” effect on its computing line of products was not obvious then.
One thing we do know though is the kind of company Apple is - a company that has been able to consistently innovate, a master in building appealing and sexy products and a market leader by far in all new products they have entered in this century : viz Ipod and its enlarging product line, ITunes, the apple store and of course the Iphone. When a company is constantly setting new bars and reaching new heights, it is in what is termed an accelerated growth rate and using 22% growth rate just does not do justice from a valuation stand point. Take for example the telecommunications market - a huge market that apple is just entering into - are you appropriately factoring growth rates into that?
The interesting thing about the future is no one really knows but then history will be the only judge of this interesting and ongoing debate.
October 13th, 2007 at 10:31 am
I like your appraoch but you are missing some very big items.
You build your model off the last 4 quarters of free cash flow. So it looks like it includes calendar Q1 and Q2 this year (2007) and calendar Q3 and Q4 last year (2006.) This is a mistake. The market looks forward and not back.
Using the last 4 quarters of free cash flow misses a bunch of very important catalysts for Apple. Try running this same model in calendar Q1-2008 and see what you get.
Calendar Q3 and Q4 this year will change the game.
Apple launched the most successful product in history (iphone) with two days remaining in calendar Q2. This will be a free cash flow machine. You will not even see it in the income statement numbers this quarter. You will start to see it in cash flow and on the balance sheet over the next few quarters. Apple will soon have an entire product line here that competes with RIMM and a global winner. This is brand new and not accounted for in the last 4 quarters. The last 4 months of cash flow don’t take this into account.
In addition, it doesn’t take into account the new imac in it’s seasonally strong season - Q3 and Q4. Calendar Q2 was up a lot with the new imac. Watch what happens in Caendar Q3 and Q4 - Q4 will also have the introduction of the new OS - Leopard.
In addition, Calendar Q4 will see the launch of several new ipod lines including the ipod touch.
Cash flow in calendar Q3 and Q4 2007 will be very strong and change the game.
Run your models after that and see what you get for a price target.
October 13th, 2007 at 11:45 am
YOUR analysis is fitting many other stocks. If you go through the same analysis with RIMM you’l find that it’s price is much too high from the economical point of view. But what about the psychologigal effect? This aspect is not taken into your analysis at all.
October 13th, 2007 at 12:08 pm
RedSox46, well put. He never mentioned the iMac or the Leopard. I’m waiting for Leopard to come out to make my first ever purchase of an Apple product in my life. I was never a fan of the Mac or their OS in +30 yrs of my life. Apple must have done something to me to make me buy their product. I wonder what it is? Hmmm…
October 13th, 2007 at 12:18 pm
“overvalued”?
hhhmmmmm…what does that really mean? Why…these stocks aren’t “valued” at all! They are bought and sold. The last few sold Friday were sold in the upper $160’s. That means they were worth $165+ to SOMEONE.
These analysis of stock prices make me laugh. If they were so accurate, wouldn’t everyone plug the numbers in at earnings calls, come up with a new price, buy or sell to that price, and sit dormant for the next 3 months?
And what happens when a company actually gets sold? GEE! the stock price moves! (up or down) You mean all that buying and selling activity for decades, and when the company actually gets sold, it wasn’t very accurate after all!
Sad fact is, if Apple actually were ever sold, to be a part of IBM, or Google, or whatever, it would likely LOSE a lot of it’s attractiveness. For instance, the iPod Mini was the biggest selling iPod when the Nano was introduced. The Mini was DISCONTINUED to make room for the Nano. How many companies would have done that? I don’t think Nokia would! I see they have phone product lines by the dozens! They THINK that gives them strength, but it is really a weakness. Shhhh! Don’t tell them! I like watching it happen! I made popcorn!
I read that a license to sell hot dogs outside the Museum of Modern Art in Manhattan is about $150k per year. I think that’s “overvalued”, so I’m not doing that job, but I’m not cursing the fact that they’ll sell tons of hot dogs at $5 a pop, and I’m sure not betting against it happening.
October 13th, 2007 at 12:29 pm
I’m entering this message from an iPhone and use it now as my primary computer as I await the release of leopard to replace my defunct dell. I’m young, but i know that those younger than me have been fed an appetizer of iphones and ipods. How unfair, then, would it be to serve them anything but an apple computer as their main course? In time, dell and ibm will flounder under the wake of a generation that has prepared their palate for a different taste.
October 13th, 2007 at 12:39 pm
Is that your $600 iPhone or your $400 iPhone?
October 13th, 2007 at 12:53 pm
The suggetion that we should look at HP to understand how difficult it is for Apple to grow so much to justify it’s optimistic valuation pretty much undermines the article.
Some people have correcty pointed out the effect of indroduction of new products into new markets that Apple has successfully undertaken. If you want to consider the “optimistic” senario, just remember that Apple has not yet made a serious attempt to get into the corporate/enterprise market. The company has many of the pieces ready. I would bet within three years you will see Apple aggressively entering this market.
Here is the overly optimistic valuation: Assume in 10 years that Apple will sell as many computers as HP but with it’s current margin, that it will sell as many phones as nokia but at iPhone margins, that it would crack the corporate market and sell other software services and solutions in that market, that it will enter gaming market, the tablet PC market, the commercial devices market such as airplane and auto. Who knows, may be they will start their own music lable, and movie studio.
But let’s not get carried away. I sure do hope that most people will agree with the analysis of the article. I would like to buy these shares for as little as possible.
October 13th, 2007 at 1:12 pm
Very interesting comments above and I learn from them all. That said, I thought what one of the most interesting developments at the beginning of the year for Apple was when Jobs announced that the company has changed its name from Apple Computer Inc. to just Apple Inc.. We talk of the captivating design features of Apple products and how intuitive these devices are. In terms of looking forward for this company, doesn’t it stand to reason that Apple Inc. could branch out into other sectors, not unlike what Google is doing with their g-phone? Could we be in the infant stage of Apple Inc.? What other sectors does Apple have it eyes on. I think I’m remembering Jobs talking about something to do with cars. Hmm.
October 13th, 2007 at 5:23 pm
My money is on Apple. I’m in it for the long run and see many new possibilities for Apple to expand. Apple has and will always be the innovator of new and exciting gadgets. Apple has a following of old timers as well as young people who have money to spend (or their parents money!)
Crunch your numbers all you want .. but in the end .. Apple will rule!
October 13th, 2007 at 5:27 pm
Oh yeah .. what would happen if Apple and Google merged? Just a thought!
October 13th, 2007 at 6:13 pm
i think as usual the halo effect is under estimated apple will hit an unbelievable number next week and the release of the new operating system will make the present os x look pokey all happening on the 22nd of oct. there will be up-graders from the present base (i own 6 macs all working though i use only one) every pc user that switches becomes a permanent mac user NOBODY in their right mind would go back unless they needed to use an access data base for some boring inventory or something. they have one of the most recognizable brands in the world and the best hardware and now macs run windows (if you need it) screw the phone its all about the software and product design apple is game changing in everything it does. name one other company that has customers like me spending my time trying to hive a heads up to poor slobs like you. (i know your using a dell i can smell it) ps look for some “by the way” new products from jobs at the next event.
October 13th, 2007 at 6:24 pm
Ps to John K i heard last week that apples market cap passed ibm so i would not look too hard for ibm to buy apple in the near future don’t forget bill gates bought a load of stock in 1995 i know he’s happy with that investment. ill bet he’s buying more and if apple drops in a couple of years i know how to short. looking at options play in the next 4 to 6 months i don’t see a lot of shorts out there typo on my last post its” Give a heads up”
October 13th, 2007 at 6:36 pm
one more thing! it is a major mistake to place apple into the pool of commodity pc makers selling the same cheap junk and competing on price. i don’t mind paying for my mac because i know that i have not wasted even 5 seconds of the last 10 years fighting off viruses and constantly shelling out money for virus updates and expired trial and and ‘halfware” fees.
i did not have to upgrade my sound card or video card and i have no idea what a dll is . my computer helps me work and get stuff done. when i need to do something i have never done before it is usually a matter of a few minutes to find out how to do it not days with tec support… and any windows user knows exactly what i mean. the pcs are noisy and feel cheap to the touch the whole comparison to dell or hp is apples to cow pies …totally moot!
October 13th, 2007 at 6:56 pm
Just a thought… Do you think that some of these analysts do their kabuki dance in hopes that the price will take a dramatic hit and they can get the deal they are looking for.
The market is not a methodical, calculated, predictive entity. It reacts to knee jerks, innuendo, “anticipation” of missed earnings even the mention of a Greenspan private conversation still causes reaction. Plug that into your analysis.
October 13th, 2007 at 10:21 pm
Apple has redefined human hand movement, other kind of “touch” really doesn’t touch.
Watch 100M iTouch users switch to iPhone because the way it touches,
In two years, users with wrong kind of touch phones would be embarrassed even making calls. The iTouch has redefined human hand movement. You don’t want behave like a monkey, do you?
October 13th, 2007 at 10:43 pm
Interesting article - didn’t understand any of it. I just know that my iPod added ENORMOUS value to my work day. I was late to the party, but am up %50. You don’t need fancy formulas to spot value.
October 13th, 2007 at 11:23 pm
What market share does APPLE has on PC and cellphone? Then you know the growth potential of this company.
October 14th, 2007 at 9:01 am
The stock market can’t be forecasted with math alone. If that were the case, all the mathematicians would be rich. Psychology will help you more in the stock market than math. The movement of a stock is the reflection of the cumulative emotions of all the buyers and sellers involved at any given moment.
I like the comment “Pretend it is 2004 or 2005 and you are trying to get a handle on Apple and its value”. That would be interesting.
October 14th, 2007 at 11:22 am
Over the years I have realized that no one can consistently pick tops and bottoms AND valuations! i TRY AND MODIFY risk by using moving stops, e.g, for Apple i have a 10% moving stop-if it continues going up the stop moves with it–If i suddenly get taken out (10% is a pretty big drop!) in a market melt down then at least i have protected some of my profits. For other stocks (I like the ETFs) i use a 5-7% moving stop depending on the etf/stocks last major drop.
October 14th, 2007 at 2:51 pm
very well said Ron.
October 14th, 2007 at 2:55 pm
hey james, are you shorting aapl? I would love if you do that. we need monkey like you.
October 14th, 2007 at 8:29 pm
You are clearly a very inexperienced investor. You cannot apply a simple formula to determine a stock price. What about investor sentiment, economic factors and other intangibles. My target for AAPL is $205 by the end of Q1. Tech stocks have a lot left in them. Just ride the waive. I know what I am talking about.
October 14th, 2007 at 8:31 pm
Jame, Stay in school a little longer. You know nothing about the market.
October 14th, 2007 at 8:57 pm
…when you come out the closet and into the light & finish college maybe you could crunch your numbers on apples sales of compuuuters. By then you will have long missed the boat.
October 14th, 2007 at 10:39 pm
All the number crunching by James sounds logical, even mildly convincing. But since my AAPL cost is 55, and the Xmas season’s right around the corner, I’m happy to be the poster boy for Cramer’s “bulls make $$, bears make $$, and pigs get slaughtered” mantra at least through December.
October 14th, 2007 at 11:33 pm
Anyone who writes “Just ride the wave” and then follows it up with “I know what I am talking about” instills me with tremendous confidence and is obviously an “experienced investor”. As for investor sentiment, would that be the same investor sentiment that took us to all time highs in mid july, nearly a 10% retracement a month later and now all time highs again. Investor sentiment is driven by lemmings an they are the ones that will listen to you when you come up with insightful remarks like “Just ride the wave” and “I know what I am talking about.”
October 15th, 2007 at 12:32 am
This is my favorite line:
“Yes, the iPod is a nifty device from everything I hear, but that is Apple’s only real successful product launch in their twenty-five years in business.”
Really? You must have a pretty tough definition of ’success.’
October 15th, 2007 at 4:00 am
Boy do I envy AlanG with his $55 apple shares–I noticed apple when it was $15 p/sh. But Damn I didn’t have any money to buy it–I knew then it would come back and here it is. I did buy it at 89 and will see go to 200 before year end. the 10/22 report will be up and the next Q will blow everyones mind. Remember whatever you see as earnings for the next two years as regards the iphone, will be considerably less than is actually in the bank at Apple because of how they account for income from iphone sales and income from AT&T–they will amortize the income (revenue) over two years. Remember Apple is conservative with their reporting.
James, you will find in life that the best source of knowledge comes from “street smarts”. I have a library of text books from college–never used in real life–and i was trained as an accountant. DCF is great when you are doing a 50 page appraisal to impress a client but what all companies use today to value is EBIT or EBITDA–it’s Just simple.
Keep in mind AT&T reports earnings before the opening on 10/23.
Apple is a multi product company with nar a bad product and computer wise the best operating system there is bar none. Its computer sales are currently growing at 300% above its competitors and taking market share relentlessly. Apple has no where to go but up–just like China.
James, I’m 65 and I suggest to you what no one ever told me to do, but I guarantee that if you could put $10,000 into apple today and forget about it, when you are 40 you will be a millionaire with that stock.
I have 1000 shares and I’m not selling no matter what you say…Go Apple! 170+ tomorrow. Hey, How about a stock split–who has anything to say about that?
October 15th, 2007 at 6:28 am
I don’t know why people, instead of using a discount rate, discount the cash flows to arrive at a current implied discount rate (just like a yield to maturity in a bond). Have you did that in your model to check how much return you get by buying aapl at 170?
Regards
Arbitrage Corner
October 15th, 2007 at 9:13 am
Arbitrage Corner,
I really like that idea and am going to look into it further - I’m already seeing that there will need to be some follow-up article on AAPL to explain in even more detail what I did here, and did I mention that I really like the “solve for the discount rate” idea? Should be interesting…
October 15th, 2007 at 6:47 pm
James, good post. Forget about those negative naysayer, your analysis is pretty good and if you are still in college you are really way ahead of A LOT of people (like those naysayer here that ‘poo-poo’ at your analysis). Understanding the value of company is 1 of the 3 most important thing in investing.
Benjamin Graham lay out the investing frame work/principle for us,
1. Look at stocks as small pieces of the business.
2. Look at market fluctuations as your friend rather than your enemy-profit from folly rather than participate in it.
3. Margin of Safety
in addition, consider:
“If principles can become dated, they’re not principles.”
- Warren Buffett
October 15th, 2007 at 9:16 pm
Arbitrage Corner,
You bring up a great point. I have never thought to use that with a DCF. Thank you for the response.
October 16th, 2007 at 9:48 am
For the record, let me disclose that I am an Apple shareholder. With that being said, I think the kid gave a pretty solid analysis of the company from a valuation perspective. He ran his models using reasonable assumptions and gave us a number to talk about. It’s important to understand that his number is not to suggest that Apple won’t go to $225, but rather the fair value of that stock is around $131. No one is suggesting that the markets operate on fair market values or what we think they should be, nor the idea that we should use those pricing models as the only means by which we select our investments. Put it all in perspective. What I don’t think is fair is for some of the people posting messages here to jump on the kid’s back with these personal attacks. If you don’t like the numbers, debate them with your own detailed analysis. Here’s hoping Apple will hit $225, but at the same time, keep it up kid!
Here
October 17th, 2007 at 8:46 pm
I can’t help it, this is too fun. I’ve been eyeing these for a few days now and can’t hold back any longer. Never myself being one to shirk supplying voice in order to avoid a backlash, here goes to getting flamed. Cheers. (So many comments, hell, I’m just going to number them all).
1. D: I can’t agree more.
2. A1: Agreeable too, valuation outright doesn’t account for all possible competitive scenarios, except when guessing at the likelihood of the accuracy of future earnings.
3. Jason: Ditto, except the $80, that sounds like a guestimate.
4. Bill: Not an irrelevant model. Unless relevant models incorporate strict hope. Try craps. Also, what’s wrong with conservative models? I thought people using those won. The market might prove this [lower] valuation wrong, but, not because of the reason you think. Yes, Apple will probably go up, but those gains will be driven by speculation about future fundamental evolution; valuation doesn’t do that outright, only indirectly. Again, try craps.
6. Frank: Huh?
8. A2: See comment 10. ‘Nuff said.
9. Addison: “neat textbook formulas.” Cute. Astrology is what I prefer, personally. Also, see comment 10. ‘Nuff said here too.
11. Overvalued as in Apple is overvalued? Either way, valuation of a stock, in almost any flavor, doesn’t care about market cycles, hence the far-forward looking “neat textbook formulas.”
12. A3: It’s not a big problem, the valuation is an approximation. Oh wait, someone has said this even more accurately: see comment 13.
14. Young Lee: lol. Lazy? That’s the best one yet.
15. Zazzy: I keep sensing the same thing here, valuation is not, nor has it ever been, price prediction, outright. So much for an understanding of DCF analysis. If you want to weigh all the future prospects of a company (future products, future markets, etc) you would have to value it, right? What do you use? Something that doesn’t look backwards? How about DCF? When valuing then, wouldn’t you rather be conservative? If so, wouldn’t you do so…oh
wait, just read this post. It’s all there.
16. Oscar: This response is actually constructive, except that saying James’ assumptions are not valid. Of course they’re valid. I think you mean to discuss whether they are probable, which sadly, ultimately makes your comment invalid. Ok, I’m just kidding. What’s wrong with the beta? Here, it’s used to find relative rate of return, today, using market conditions, today, hence the use of Apple’s beta, today. Besides, should you use an even higher one, you come out more conservatively. Your second point: is this one of those invalid assumptions? HP’s reliance on the technology sector should never be confused with Apple’s reliance on the same sector. Huh.
17. Guru: Most people who use valuation perform the same valuation periodically, in other words, this valuation is not some singular thesis, not some stone cast, upon which we should look, never to cast eyes upon secret caverns, passageways and such beyond those from which any essence of future prospects from the very heavens ought to lend sight beneath the eyes of the very blind. Think about that statement long and hard.
18. Eat_it: Again, valuation doesn’t do this outright. Find the Harley-Davidson article on here somewhere; an excellent job of product mix, etc. Want a fine example of narrow mindedness? Start by reading your comments.
19. Eat_it: Oh, you again. Hell, he just might. This is a post about Apple. Stop being so narrow. Since you haven’t contributed anything significantly useful, does that mean that you’re not young, or never studied in college?
20. Traderguru: First you complain that branding is not included in DCF, but then suggest that if it were, it would be highly speculative. If the latter is so, why would you want it in there? How about the best of both worlds? As in, let’s kind of put in there. Oh wait, it does that.
21. Redsox46: Instead of using past cash flows, I know let’s use random ones. Or better yet, let’s use some conservative future earnings estimates. Oh wait, again, they’ve done that. As said previously, most who use valuation, use it often.
22. Moshe Cocos: Psychology vs. Valuation. Ask Warren Buffet’s shrink which works better. I bet he drives a Beamer.
23: Eat_it: Ok, throw in some psychology, increase future earnings. Fine tune it. Valuation wasn’t designed for absolute precision, and psychology won’t get you any closer either.
24. Not valued at all? That brought tears to my eyes.
25. Peter: Blah, blah
26. James: Better hope its the $600 one, that way we know past cash flows are inflated.
27. Pete: Who really wants overly optimistic? Isn’t it already? Or has all the hype and pizzazz disillusioned you?
29. Yahonusa: Fascinating.
30. Yahonusa: Yahonusa=Thrasymachus. Scary.
31. Toojones: Heads up to poor slobs like who? Poor, they might be, they’re in college. Slobs though? Wow, you’re jealous, aren’t you? I can smell it.
32 & 33. Toojones: You forgot to say dude.
34. Aapl o’nr: Oh great, here come the conspiracy theories.
35. cc: Redifined…wait a minute…I get it, you’re a robot! See last response.
36. Masterchief: Glad you didn’t spot it. It wasn’t there. You bought hype.
37. cc: I don’t know, what do I has [sic] to gain from that?
38. Ron: Good. The stock market ISN’T forecasted with math alone. In fact, neither is Apple in this article. A valuation is a valuation, not a forecast outright.
39. DR M: Like as in, Warren Buffett cannot?
40 & 41. Nomath: I know the article was confusing. Blues Clues is on another domain.
42. Uh, who’s determining stock prices? The stock market does that. This is a valuation.
43. Check your spelling, then capitalization.
44. Nadia: WTF?
45: AlanG: At least your comment is rational.
46. Dave Miller: lol
47. EKW: Yes he does. Because of that, guys like you might end up working for guys like him.
48. Street smarts? Right, like cocaine prices. James could be a millionaire long before he’s 40, and if he does, it won’t be because of street smarts learned, finally, by retirement age.
51: Traderatwork: I love you.
October 17th, 2007 at 9:27 pm
[...] drew much criticism on my article entitled “Why Apple (AAPL) Is Not a Good Value,†although I have to thank several people for their comments, some of which insinuated I might [...]
October 18th, 2007 at 2:08 pm
Lots of criticism, but also some recognition for your efforts . . . . http://www.fakegene.blogspot.com . .. the ultimate authority on AAPL
October 18th, 2007 at 7:33 pm
You went over to the Apple board on Yahoo and posted there. I had a follow up post saying that I, too, have used DCF and remember trying to value Walmart with it more around 20 years ago. It was hard to see then how flexible the company was and how well their strategies would work with suppliers and Superstores, etc. DCF is easier to do on companies like Kraft Foods.
Today you can see that Apple is building up a large amount of cash and has the flexibility to enter more markets than they currently address. Apple has very good strategic vision and executes very well on their vision. They keep streamlined in their approach They will have more and more pricing power with suppliers as each of their growth engines develop. How do you account for this in your analysis?
You have yet to address the 3G iphone or the new Mac tablet that analysts are talking about. These are products that are expected. Apple’s cash levels give them the ability to get into even more areas that will keep the company growing–like gaming, or really addressing the enterprise market.
I recently summarized the latest analysts’ targets for Apple on the Apple Yahoo message board. One analyst may interest you: Argus … Wendy Abramowitz … Oct. 11, 2007 … $175 … (was $160) … buy … FY 2008 earnings estimate: $4.47; FY 2009 earnings estimate: $5.32; and quote: “Our discounted cash flow model now renders a value of $245 for the stockâ€.
So, here is another person talking about DCF for Apple and their number is nearly twice yours. BTW, her target price is lower than 15 other analysts’ targets. Wonder what parts of her analysis differed from yours? And I also wonder what the other 15 analysts have factored into their analyses that differs from yours.
October 19th, 2007 at 5:52 pm
[...] my original article on “Why Apple (AAPL) Is Not a Good Value,†I was pressed to show more than my assumed growth rates in order to provide additional [...]
October 20th, 2007 at 1:51 am
It’s pretty obvious by James Cullen’s incomplete analysis and defensive attitude to counter analysis that he still has a ways to mature. His analysis was not thorough and then has difficulty accepting criticism. Patience James. Let’s see where aapl is after 10/23/07, then after MacWorld on 10/15/08 and then finally after the 4th quarter earnings in 01/08. Better yet, not forgetting the two year financial reporting of the iPhone revenue, let’s see where aapl is mid 2009. Investors will miss out an incredible aapl stock run if they follow your analysis. Let’s just wait and see.
October 20th, 2007 at 2:13 pm
If you really feel the analysis in the above article is incomplete and aren’t just complaining because my valuation of AAPL doesn’t result in a price like “$2XX”, read the most thorough post I did on this subject - it’s linked to right above your comment.
As for my “defensive attitude” - at the risk of being defensive, I think you are far off base. I responded to several comments in a follow-up post, linked to in a comment three above yours. As for questioning my maturity, who are you to post an anonymous comment (and leaving no contact information) saying anything about that? I guess we’ve regressed to the point where one can throw jabs from the shadows and still maintain a holier-than-thou attitude.
If you have something material - other than speculation - to share, feel free to try again.
October 22nd, 2007 at 6:00 pm
Wow…if Apple is only worth around 130 I dunno what those sucker are doing bidding up to 187-189 today. Poor fools. When it breaks 200 they are going to be sorry. Just wait till i point them to this fantastic DCF model. Earnings be damned, they will run for the exits…
Man I feel the sucker buying at 135 and then again at 170…
October 22nd, 2007 at 6:07 pm
P.S. I don’t think anyone thinks that buying Apple is valuing investing any more than buying google is. Buffet wouldn’t buy Apple, Grahm wouldn’t buy Apple, Dodd wouldn’t buy Apple…is that really news though? If your valuing investing, you can save a lot of time doing all the math…just avoid any stock with a P/E over 40…
December 7th, 2007 at 6:26 pm
You, sir, are a fucking asshat. Your sophomoric attempts at valuing AAPL via rudimentary analysis is silly–although, your retention of vocab words in nice. Come over, if you have the balls.
December 12th, 2007 at 3:04 pm
[...] nothing short of phenomenal will seem to satisfy investors. Most of the nicer responses to “Why Apple is not a Good Value” tell me I have no idea how much Apple will grow, etc. - ignoring that the growth I priced in [...]
January 27th, 2008 at 2:51 pm
[...] upon a time, I said Apple (AAPL) is reasonably worth $131. Despite what a lot of people said in comments here and on Seeking Alpha about how AAPL would never [...]
June 7th, 2008 at 3:09 pm
Less than 8 months later and AAPL has gone from 167.25 to 185.64 up nearly 11%.
In the end it only matters if you make or lose money.
———-
James Cullen: That was hardly a straight, clean 11%. In the interim, you had to deal with a better-than 35% drawdown, and interestingly enough, not a soul was around here defending AAPL when it was in the $120s.
October 19th, 2008 at 2:59 pm
Seems the analysis is right…kinda a nice feeling when a savvy investor points out the stock way over valued. I’m only an engineer, but somehow, my gut arrived around the 130 mark before I read this article. I do think right now it’s undervalued, but I think AAPL is slow right now and doesn’t have too many big ideas that are going to WOW us. Until the iPhone comes out with turn-by-turn navigation, that will be the next big gulp Apple takes in terms of market share.
September 8th, 2009 at 12:50 am
[...] Analysis:James Cullen presents Why Apple (AAPL) Is Not a Good Value posted at College Analysts, saying, “A DCF Valuation of [...]
September 8th, 2009 at 12:51 am
[...] Here is a great valuation of Apple shares. I am sure Apple fans will respond with, “he is [...]