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Apple (AAPL) valuation using Discounted Cash Flow (DCF) model

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Apple (AAPL) valuation using Discounted Cash Flow (DCF) model

Apple (AAPL) valuation using Discounted Cash Flow (DCF) model

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  • 1. Apple (AAPL)Valuation Analysis
    Naren Chawla
  • 2. 2
    Outline
    Corporate Overview
    Financials
    Competitive Landscape
    Trends, Forecast & Insights
    Key Assumptions
    DCF
    Conclusion
  • 3. © Copyright 2008 SAP AG. All rights reserved. SAP Internal — Confidential Only
    3
    Corporate Overview – Product Portfolio
    Mac Hardware Products
    Portable (Notebooks)
    MacBookPro
    MacBook
    MacBook Air
    Desktops
    Mac Pro
    iMac
    Mac mini
    Xserve
    iPhone
  • 17. 4
    Corporate Overview – Market Segments
    Target Customers
    Consumers
    Small and Mid-sized Businesses (SME)
    Education
    Enterprise
    Government
    Creative
  • 22. 5
    Corporate Overview - Revenue Growth Rate/Product Timeline
  • 23. 6
    Corporate Overview – Revenue Breakdown
    Eggs in one basket ?
  • 24. 7
    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.
  • 25. 8
    Financials - Revenue Growth Rate
  • 26. 9
    Financials - Capex Growth Rate
    Ignoring 2002, we assumed CAPEX growth rate of 3%
  • 27. 10
    Financials
    Capital Structure – 100% Common Equity
    $34 Bln in Cash Reserves
  • 28. 11
    Competitive Landscape
    AAPL derives a competitive advantage from its focus on innovation
    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
    Unique in the industry for its control of the development of its hardware, operating system and many software applications.
    iTunes download service and App Store – differentiated offerings
    AAPL's retail strategy
    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
    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)
  • 29. 12
    Competitive Landscape
    Happy Meal
    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
  • 30. 13
    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 –
    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.
  • 31. 14
    Trends, Forecast and Insights
    The Smartphone space has a lot of potential in emerging markets
    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
    Enter untapped new segments – soccer moms, elderly, etc. – blue ocean strategy
    Halo Effect – Share of wallet
    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)
  • 32. 15
    Trends, Forecast and Insights
    Notice the higher profit margin
    Source: IDC, Gartner, Strategy Analytics
  • 33. 16
    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
    • 34. Redefine the publishing industry
    • 35. 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
    • 36. Magazines/Newspaper online
    • 37. Hybridized content that draws from audio, video and interactive graphics in books, magazines and newspapers
  • 17
    Trends, Forecast and Insights
    Bearish Factors
    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
  • 38. 18
    Key Parameters for Valuation - WACC
    Current Capital Structure: Common Equity Only
    WACC = (11.7 + 11.3)/2 = 11.50%
  • 39. Beta Calculations
    • Apple:
    • 40. Annual Returns:
    • 41. Nov 04-Nov 05: 119.81%
    • 42. Nov 05-Nov 06: 40.79%
    • 43. Nov 06-Nov 07: 134.27%
    • 44. Nov 07-Nov 08: -43.36%
    • 45. Nov 08-Nov 09: 75.20%
    • 46. Mean Monthly Return: 4.14%
    • 47. Mean Annual Return: 65.34%
    • 48. Monthly Standard Deviation: 12.45%
    • 49. Annual Standard Deviation: 71.12%
    • 50. S&P 500:
    • 51. Annual Returns:
    • 52. Nov 04-Nov 05: 6.80%
    • 53. Nov 05-Nov 06: 14.16%
    • 54. Nov 06-Nov 07: 12.44%
    • 55. Nov 07-Nov 08: -37.47%
    • 56. Nov 08-Nov 09: 6.96%
    • 57. Mean Monthly Return: -0.04%
    • 58. Mean Annual Return: 0.58%
    • 59. Monthly Standard Deviation: 4.61%
    • 60. Annual Standard Deviation: 21.52%
    19
  • 61. 20
    Key Parameters for Valuation - Beta
  • 62. 21
    Discounted Cash Flow
    25%
    $250
    $99
  • 63. 22
    Discounted Cash Flow
    iTablet
    $500
  • 64. 23
    Discounted Cash Flow
    Highest: $652
    Lowest: $127
    Average: $284
  • 65. 24
    Conclusion
    Under-value or Over-valued : Blue Pill or Red Pill
    If we believe
    iPhone will keep up with innovation and grab market share from Nokia and others
    GOOG will not bring out change the game substantially with Android
    Company can function effectively without Jobs in future
    iTablet (or whatever it gets named) will more than compensate for drop in desktop and portables growth
    Then, AAPL is undervalued. The value should be closer to $240.
  • 66. 25
    Resources for Valuation Analysis
    Appendix
  • 67. 26
    Resources for Valuation Analysis
    Apple 10-K for past 5 years
    Analysts Reports – S & P, Reuters
    Trefis
    AppleInvestor, AppleInsider, IDC, Gartner, NYT, Google

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