AAPL Valuation

Apple Inc. on the podium for the most well-known brands, highest-market-capitalized and profitable companies in the world. It generally needs no introduction, but anyway, let’s hear it from them:

At its core the company has this double strategy of (manufacturing and) selling both the hardwares (PCs, tables, smartphones, accessories) and the softwares.

Two main categories: “Products” (basically hardwares) and “Services”. The Company further divides its business into five categories:

iPhone has the lion share of it all, with

52.2% of net sales, followed by Services (22.2%) and then the other hardwares/products: “Wearable, Home and Accessories” (10.4%), Mac (7.6%), and iPad (7.4%).

Source: Official 10-K.

What do they mean by Services? Well, the list is long, and chances are you know them all, but you didn’t quite figure it out.

Services include: (a) Advertising (include third-party licensing arrangements and the Company’s own advertising platforms); (b) AppleCare (a portfolio of fee-based service and support products), (c) Cloud Services (with interactions also with Windows personal computers), (d) Digital Content (App Store® etc.), (e) subscription-based services (including Apple Arcade®, for games; Apple Fitness+SM for personalized fitness; Apple Music®; Apple News+®; Apple TV+®, with exclusive original content and live sports ever expanding). Last but not least: (f) Payment Services (including Apple Card®, a co-branded credit card not yet available in Italy, and Apple Pay®, a cashless payment service based on NFC technology).

A bit of history if you like:

2015 = Launch of Apple Pay, Apple Music

2019 = Launch of Apple Arcade, Apple TV+, Apple Card

2020 = Launch of Apple One, Apple Fitness+

2024 = Launch of Apple Sports

Source: Apple official website.

This vast sector as a whole, represents one of the most promising growth factors due to the loyalty of Apple’s user base with various estimates ranging around 80% and a high user retention of around 90%.

This is a key factor as the hardware part of the company is approaching its saturation (especially referring to iPhones).

said Tim Cook, Apple’s CEO during the last earnings release at the beginning of February.

Why all the fuss about services?

Well, look at its margins:

Source: Official 10-K.

70% Gross margin is quite impressive for a category still in its growth phase.

I’ve added some details about the geography breakdown of revenues, but I won’t dive into that since there isn’t much to add to this page from the most recent annual filing (10-K).

Source: Official 10-K.

A notable aspect is the sensitivity the Company has to forex (foreign exchange) fluctuation, which can be estimated to be around 3%. A stronger USD leads to lower Sales, all other factors being equal.

A strong point against those arguing the company is “American”. This is a truly global Company.

What About AI?

I’m not sure what the future holds in this respect will be, but consider these:

• proven track record of innovation;
• abundance of cash resources;
• high rate of strategic acquisitions (reported to have acquired more than 30 AI companies in 2023);
• availability of massive data sets to train machine learning (ML) algorithms.

I’m not pricing this fancy new product into the valuation yet. The motivation is twofold: (a) I haven’t used it yet, and (b) I haven’t fully understood its true potential, nor has the general public. Will it be like the iPhone back in 2007 when it launched and Steve Ballmer famously laughing at its high price tag (around $500) with the then-unthinkable lack of a physical keyboard?

Prepare to discover it!

The Company is facing several risks both on the short-term and on the long-term. It has always been the case.

Some new risks regard the:

(a) increasing probability of opening up the App Store (as per legislative initiatives such as the EU Digital Markets Act, the anticompetitive investigation around Epic Games and Spotify);

(b) China restrictions (as in the sales of iPhone)

(c) crowded smartphone industry especially with Asian Companies (notably the fierce competition from Samsung which recently already added AI capabilities to its newest Galaxy S24.

I based my valuation on FCF (Free Cash Flow). Starting from an arbitrary value of $105 billion based on the FCF trend of recent 5 years.

Source: Author calculations.

The Company uses it mostly to repurchase shares. During 2023 $76.6 billion of common stocks were repurchased and the Company paid $15.0 billion of dividend and dividend equivalent spend last fiscal year).

The current dividend yield is quite low, at 0.5%.

That’s good fiscal-wise. That’s also very good for the shareholders and stakeholders.

I’ll leave detailed analysis to another moment.

I imputed different growth rates for year 1 to 5 and 6 to 10, different discount rates and terminal value multiples according to 5 hypothesized “Mr. Market” manic-depression moods.

Confronting the results in respect to the broader financial metric known as Enterprise value (EV), the results surprised me a bit.

There is no one scenario in which I can comfortably view the Company as on sale nor a possible buy.

Assuming the 15.8 billion of fully diluted shares outstanding, the overvaluation ranges between 10% and 74%.

Source: Author’s calculations.

Source: Author’s calculations.

I’m turning my rating into “Neutral”.

Sometimes it is better to buy great companies at fair prices, than the other way around (credits to the late Charlie Munger). This time I can’t feel comfortable even about the fair price even though I consider the Company to be great.

References: You can find the official 10-K on the Company’s official website or at this shortcut link.

Disclaimer: I am not a financial advisor or registered investment advisor. The information contained in this article is for informational purposes only and should not be construed as financial advice. Past performance is not a guarantee of future results. You should always conduct your own research before making any investment decisions.

Disclosure: I/we are long AAPL and US stocks in general.