E How Apple Is Valued On A Discounted Cash Flow Basis

image source: hubtechinfo.com (artist's rendering of what the iPhone 7 may look like)

On the surface, Apple (AAPL) is attractively valued with a trailing and forward PE of 11.  Apple is priced 35% below the S&P 500 which is trading with a forward PE of 17.  Since the company is such a strong generator of cash flow, I felt that a discounted cash flow analysis would be appropriate to determine how much the company is worth.  The DCF analysis will show how low Apple is trading below its intrinsic value. 

Since there are numerous assumptions that are made when doing a DCF analysis, I will give multiple scenarios.  By running multiple scenarios, investors can get a broad range of figures for the intrinsic value.   However, the results are quite profound even when using conservative assumptions.

In each scenario, I factor in Apple’s free cash flow from 2015 of $69.79 billion, the debt level of $79.9 billion, and 5.48 billion shares outstanding.   The debt is subtracted from the total present value of cash flows before dividing by the number of shares.

This profound look at Apple’s intrinsic value shows the company has a large margin of safety.  Sure, the stock can still decline more from current levels.  However, any positive catalysts in the form of better than expected iPhone sales in future quarters is likely to change investor’s perceptions and bid up the stock price.   Since the company is expected to grow revenue and earnings next year (consensus) after this year’s dip, I consider it likely that Apple’s stock will recover over the next year. 

I have used a discount rate of 10% because that is the market’s historical average annual return that I aim to beat.  Here’s how the results look:

Discount Rate

10%

10%

10%

10%

10%

FCF Growth for Years 1 – 10 (annual)

-5%

0%

0.5%

1%

3%

FCF Growth in

Perpetuity (annual)

-5%

0%

0.5%

1%

3%

Intrinsic Value

Per Share

$66

$113

$120

$128

$173

Current Price

$99

$99

$99

$99

$99

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Disclaimer:This article represents the author's opinions.  Investors should do their own due diligence and consult with an investment advisor to determine which stocks are right for ...

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Joe Economy 5 years ago Member's comment

And if you"re wrong, and the Iphone 7 is less of a hit than the hype suggests, the stock could be in a for a hefty crash. I think there's more room for a 10-20% decline than a 10% increase in the stock price. Global smart phones sales are on the decline and after so many repeated new releases of the Iphone, perhaps Apple is beginning to lose its sexiness. After all, its just a phone and there's only so much that can separate the Iphone from its cheaper Chinese competitors, surely? Look out Apple, China is creaping up behind you...

David Zanoni 5 years ago Author's comment

Remember Apple was trading at about $133 last year. If sales of the iPhone 7 are strong enough to grow revenue again, I think the stock price could exceed $133 within the next 2 years. The sentiment for the stock became irrationally too negative in my opinion.

Alpha Stockman 5 years ago Member's comment

I concur.