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Apple (AAPL)
Valuation Analysis
Naren Chawla
Outline
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Corporate Overview
Financials
Competitive Landscape
Trends, Forecast & Insights
Key Assumptions
DCF
Conclusion
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Corporate Overview – Product Portfolio
• Mac Hardware Products
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Portable (Notebooks)
• MacBookPro
• MacBook
• MacBook Air
• Music Product & Services
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Desktops
• Mac Pro
• iMac
• Mac mini
• Xserve
iPod Shuffle
iPod Nano
iPod Classic
iPod Touch
ITunes 9
• Peripheral Products
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Displays
Apple TV
• Software
• iPhone
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© Copyright 2008 SAP AG. All rights reserved.
— Confidential Only
SAP Internal
Operating System
iLife
iWork
Final Cut Studio
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Corporate Overview – Market Segments
• Target Customers
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Consumers
Small and Mid-sized
Businesses (SME)
Education
Enterprise
Government
Creative
• Geographic Segments
• Americas
• Europe
• Japan
• Retail
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Corporate Overview - Revenue Growth Rate/Product Timeline
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Corporate Overview – Revenue Breakdown
Eggs in one basket ?
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Financials
• $100 invested in AAPL in Sept 2004 -> $957 in Sept 2009
• Note that historic stock price performance is not necessarily indicative
of future stock price performance.
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Financials - Revenue Growth Rate
Revenues
2002
2003
2004
2005
2006
2007
2008
2009
742
6,207
8,279
13,931
19,315
24,006
32,479
36,537
737%
33%
68%
39%
24%
35%
12%
Growth Rate
Arithmetic Mean
35%
Geometric Mean
31%
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Financials - Capex Growth Rate
2002
2003
2004
2005
2006
2007
2008
2009
• Ignoring 2002, we assumed CAPEX growth rate of 3%
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Financials
• Capital Structure – 100% Common Equity
• $34 Bln in Cash Reserves
AAPL
Industry
Sector
(Technology)
S&P 500
P/E Ratio (TTM)
31
22
17
128
Total Debt to Equity
0
39
29
200
Gross Margin (TTM)
36
10
16
27
Return on Assets (TTM)
12
4
2
4
Return on Equity (TTM)
23
10
3
9
Ratio
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Competitive Landscape
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AAPL derives a competitive advantage from its focus on innovation
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APL entered the consumer device market with the iPod in 2001, and in FY 08, it sold almost 9.2 million iPod
units.
In mid-2007, AAPL introduced the iPhone, and in June 2008, it introduce the iPhone 3G. As of the end of FY
08, the company had signed agreements to ship iPhones in 70 countries.
Own Operating System
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Unique in the industry for its control of the development of its hardware, operating system and many
software applications.
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iTunes download service and App Store – differentiated offerings
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AAPL's retail strategy
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As of the end of FY 08, it had 247 stores, including 205 in the U.S. The strategy behind this retail presence is
to attract foot traffic in order to expand the customer base for all product lines (now emulated by
Microsoft)
Happy Meal
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iPod Touch marketed to pre-teens and teens before they own a mobile phone, eventually, will lead to
iPhone sale (lock-in kids now as future customers)
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Competitive Landscape
• Happy Meal
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iPod Touch marketed to pre-teens and teens before they own a mobile phone, eventually, will lead to
iPhone sale (lock-in kids now as future customers) - SWITCHING COSTS
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Trends, Forecast and Insights
• The unit sales of mobile phones have increased from 904 million -> 1250
million units at an annualized rate of 11%.
• Around 1 billion mobile phones sold globally (projection: 1.8 Billion by 2016),
smart phone shipments worldwide today – 140 million
• The iPhone was launched in June 2007. 270,000 iPhones sold in 30 hours on
launch. iPhone Market Share increased from 0.3% in 2007 to 1.10% in
2008. Currently, AAPL has 8 % market share of smart phone market.
• 300,000 iPhone Applications by 2010 – Platform Strategy
• Increasing Wi-Fi and Mobile Broadband Availability –
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4G in 2011: Speeds - 2 MB – 20 MB
Availability of mobile TV shows, films, games, photo sharing, software applications, and video
conferencing are potential points of differentiation among smart phone competitors.
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Trends, Forecast and Insights
• The Smartphone space has a lot of potential in emerging markets
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Apple has announced a deal with China Unicom, China's #2 mobile phone provider, to distribute iPhones by Q4
2009. China Unicom has over 140 million subscribers within the 700 million subscriber Chinese mobile phone
market. 2 million iPhones in gray market in china.
India has total wireless subscribers base of more than 525 million now.
• Extraordinary consumer-friendly interface and features rich products
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Enter untapped new segments – soccer moms, elderly, etc. – blue ocean strategy
• Halo Effect – Share of wallet
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The larger the number of application, more compelling for people to buy iPhone (versus competition)
iPhone/iPod sales will lead to increase in iMac sales due to superior integration between the two
Users who buy iMac desktop will be compelled to buy MacBook (notebooks) due to ease of integration
iMac sales will lead to AppleTV sales (now you can watch your content on TV)
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Trends, Forecast and Insights
Notice the higher profit
margin
Source: IDC, Gartner, Strategy Analytics
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Trends, Forecast and Insights
• Shift from Desktops to Notebooks and Net Books (and Tablets)
A really fake
picture
• 10-inch multi-touch Tablet – LCD or OLED – new product family
• Redefine the publishing industry
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Textbooks are sold new at a few hundred dollars, and resold by local stores without any kickbacks to publishers. A DRM'd
one-time-use book would not only be attractive because publishers would earn more money, but electronic text books
would be able to be sold for a fraction of the cost, cutting out book stores and creating a landslide market share shift by
means of that huge price differential. Textbook market
Magazines/Newspaper online
• Hybridized content that draws from audio, video and interactive graphics in
books, magazines and newspapers
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Trends, Forecast and Insights
• Bearish Factors
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Eggs in one basket – desktop, portables, ipod revenues are dropping
or flat, currently growth is only coming from iPhone
RIM, GOOG, NOK – strong competitors in smartphone market
Pricing - AAPL charges premium pricing compared to competition
Steve Jobs is no longer there
Black-Necked Swan type event
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Key Parameters for Valuation - WACC
Framework
Results
rS = rRF+ (RPM)bAPPL
CAPM
Bond Yield +
Risk Premium
20% Debt
10 Year Treasury Bond: 3.20
Market Risk Premium: 5.4% (source: Ibbotson)
Beta for Apple: 1.58
rS = 3.20 + (5.4)(1.58) = 11.7%
Using 10 Year Bond issued by Dell on June 15, 2009:
N = 9*2 +1 = 19 periods
PV = -999.33
PMT = 0.5(.05875*1000) = $29.38
FV = 1000
I = 2.94; YTM = 5.885%
rS = 5.885 + 5.4 = 11.3%
0.2(rD)(1-T) + 0.8(rS)
= 0.2(5.89)(1-0.3) + 0.8(11.50)
= 10.02%
• Current Capital Structure: Common Equity Only
• WACC = (11.7 + 11.3)/2 = 11.50%
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Beta Calculations
• Apple:
• S&P 500:
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Annual Returns:
• Nov 04-Nov 05: 119.81%
• Nov 05-Nov 06: 40.79%
• Nov 06-Nov 07: 134.27%
• Nov 07-Nov 08: -43.36%
• Nov 08-Nov 09: 75.20%
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Annual Returns:
• Nov 04-Nov 05: 6.80%
• Nov 05-Nov 06: 14.16%
• Nov 06-Nov 07: 12.44%
• Nov 07-Nov 08: -37.47%
• Nov 08-Nov 09: 6.96%
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Mean Monthly Return: 4.14%
Mean Annual Return: 65.34%
Monthly Standard Deviation:
12.45%
Annual Standard Deviation:
71.12%
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Mean Monthly Return: -0.04%
Mean Annual Return: 0.58%
Monthly Standard Deviation:
4.61%
Annual Standard Deviation:
21.52%
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Key Parameters for Valuation - Beta
ri = 1.508rM + 0.038
R² = 0.337
Historic Realized Returns
for AAPL
Historic Realized Returns
for S &P 500
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Discounted Cash Flow
25%
$250
$99
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Discounted Cash Flow
iTablet
$500
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Discounted Cash Flow
Highest: $652
Lowest: $127
Average: $284
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Conclusion
• Under-value or Over-valued : Blue Pill or Red Pill
• If we believe
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iPhone will keep up with innovation and grab market share from
Nokia and others
GOOG will not change the game substantially with Android
Company can function effectively without Steve Jobs in future
iTablet (or whatever it gets named) will more than compensate for
drop in desktop and portables growth
• Then, AAPL is currently undervalued. The value should be closer to
$240.
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Resources for Valuation Analysis
Appendix
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Resources for Valuation Analysis
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Apple 10-K for past 5 years
Analysts Reports – S & P, Reuters
Trefis
AppleInvestor, AppleInsider, IDC, Gartner, NYT, Google
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