Apple: Stress-Valuation

I suggest making a stress-valuation of Apple’s (AAPL) fundamental price using DCF modeling. In other words, let’s model how much Apple can cost with fairly tough forecast key parameters for the next 10 years.

Let’s start with the revenue.

I do not want to set your teeth on edge, but I have to remind you that Apple’s revenue, according to the latest officially published data, is almost 60% thanks to the iPhone:

And the fact that the company has ceased to publish statistics on sales of its products makes us believe that in the last quarter, iPhone sales have declined for the first time since 2016. And this time, it is not caused by the « high base » effect, but by the over-saturation of the smartphone market:

Against this background, analysts‘ average forecasts suggesting a decrease in Apple’s revenue this year and less than 4% growth in the next fiscal year look very adequate:

Based on these forecasts, I assume that starting from 2021, Apple’s revenue growth rates will not show rapid progress but will continue to gradually slow down to the terminal year. In any event, we have agreed to consider tough forecast parameters.

I proceed from the assumption that the operating margin will gradually decrease from the current level to 20%. Given the history of this indicator in Apple, this input can be called as pessimistic:

Chart Data by YCharts

Also, the model involves a gradual increase in the relative size of CAPEX from 5% in 2017 up to 5.8% in 2026, which is consistent with the observed growth in Apple’s capital spending.

Chart Data by YCharts

Here is the actual WACC calculation:

When calculating WACC, I used the current 1-y Beta Coefficient. Now, it is close to a five-year maximum and in the future, it will likely be prone to decline. Therefore, I include a gradual, moderate decrease in WACC in the model.

So, here’s the model itself:

The DCF based target price of Apple’s shares is $250, offering 43% upside, which is pretty good considering the very modest revenue growth forecast and the expectation of lower profitability.

OK. Then I had a question: with what revenue and operating margin forecasts will DCF modeling show zero potential for growth in the company’s capitalization?

In search of an answer to this question, I went over different options and now I set forth the least absurd one:

As you can see, the « zero » option implies Apple’s revenue growth over the next ten years, with a CAGR of 1.8%. And the operating margin is to drop to 11%. I cannot say that the last option is absolutely impossible, but still, it is extreme, based on the current Apple development trend.

As a conclusion…

Over the past six-ten months, I have published a number of versatile analyzes devoted to Apple, each of which negatively characterized the company’s investment attractiveness. And it’s not that I strongly dislike Apple, but only such conclusions could be drawn from the performed analyzes.

Today, I have to look at Apple in a different way because from the point of view of DCF modeling, only the expectation of almost zero revenue growth and a catastrophic drop in profitability can justify Apple’s current price. Besides, Beta Coefficient is objectively very high, and its decrease to at least 0.8 will considerably increase the fair valuation of the company’s share.

But there is something else… Look at how analysts’ forecasts have changed regarding Apple’s EPS and revenue:

They are getting worse and worse, and in such a situation, it is difficult to say what forecast concerning Apple’s revenue and profitability can be considered acceptable when building a DCF model…

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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