Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

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

9,293 views

Published on

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

Published in: Economy & Finance
  • Be the first to comment

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

  1. 1. Apple (AAPL)Valuation Analysis<br />Naren Chawla<br />
  2. 2. 2<br />Outline<br />Corporate Overview <br />Financials<br />Competitive Landscape<br />Trends, Forecast & Insights<br />Key Assumptions<br />DCF<br />Conclusion<br />
  3. 3. © Copyright 2008 SAP AG. All rights reserved. SAP Internal — Confidential Only<br />3<br />Corporate Overview – Product Portfolio<br /><ul><li>Music Product & Services
  4. 4. iPod Shuffle
  5. 5. iPod Nano
  6. 6. iPod Classic
  7. 7. iPod Touch
  8. 8. ITunes 9
  9. 9. Peripheral Products
  10. 10. Displays
  11. 11. Apple TV
  12. 12. Software
  13. 13. Operating System
  14. 14. iLife
  15. 15. iWork
  16. 16. Final Cut Studio</li></ul>Mac Hardware Products <br />Portable (Notebooks)<br />MacBookPro<br />MacBook <br />MacBook Air<br />Desktops<br />Mac Pro<br />iMac<br />Mac mini<br />Xserve<br />iPhone<br />
  17. 17. 4<br />Corporate Overview – Market Segments<br /><ul><li>Geographic Segments
  18. 18. Americas
  19. 19. Europe
  20. 20. Japan
  21. 21. Retail</li></ul>Target Customers<br />Consumers<br />Small and Mid-sized Businesses (SME)<br />Education<br />Enterprise<br />Government<br />Creative<br />
  22. 22. 5<br />Corporate Overview - Revenue Growth Rate/Product Timeline<br />
  23. 23. 6<br />Corporate Overview – Revenue Breakdown<br />Eggs in one basket ?<br />
  24. 24. 7<br />Financials<br />$100 invested in AAPL in Sept 2004 -&gt; $957 in Sept 2009<br />Note that historic stock price performance is not necessarily indicative of future stock price performance.<br />
  25. 25. 8<br />Financials - Revenue Growth Rate<br />
  26. 26. 9<br />Financials - Capex Growth Rate<br />Ignoring 2002, we assumed CAPEX growth rate of 3%<br />
  27. 27. 10<br />Financials<br />Capital Structure – 100% Common Equity <br />$34 Bln in Cash Reserves<br />
  28. 28. 11<br />Competitive Landscape<br />AAPL derives a competitive advantage from its focus on innovation<br />APL entered the consumer device market with the iPod in 2001, and in FY 08, it sold almost 9.2 million iPod units.<br />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. <br />Own Operating System <br />Unique in the industry for its control of the development of its hardware, operating system and many software applications.<br />iTunes download service and App Store – differentiated offerings<br />AAPL&apos;s retail strategy <br />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)<br />Happy Meal<br />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)<br />
  29. 29. 12<br />Competitive Landscape<br />Happy Meal <br />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<br />
  30. 30. 13<br />Trends, Forecast and Insights<br />The unit sales of mobile phones have increased from 904 million -&gt; 1250 million units at an annualized rate of 11%. <br />Around 1 billion mobile phones sold globally (projection: 1.8 Billion by 2016), smart phone shipments worldwide today – 140 million<br />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.<br />300,000 iPhone Applications by 2010 – Platform Strategy<br />Increasing Wi-Fi and Mobile Broadband Availability – <br />4G in 2011: Speeds - 2 MB – 20 MB<br />Availability of mobile TV shows, films, games, photo sharing, software applications, and video conferencing are potential points of differentiation among smart phone competitors.<br />
  31. 31. 14<br />Trends, Forecast and Insights<br />The Smartphone space has a lot of potential in emerging markets<br />Apple has announced a deal with China Unicom, China&apos;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.<br />India has total wireless subscribers base of more than 525 million now. <br />Extraordinary consumer-friendly interface and features rich products<br />Enter untapped new segments – soccer moms, elderly, etc. – blue ocean strategy<br />Halo Effect – Share of wallet<br />The larger the number of application, more compelling for people to buy iPhone (versus competition)<br />iPhone/iPod sales will lead to increase in iMac sales due to superior integration between the two<br />Users who buy iMac desktop will be compelled to buy MacBook (notebooks) due to ease of integration<br />iMac sales will lead to AppleTV sales (now you can watch your content on TV)<br />
  32. 32. 15<br />Trends, Forecast and Insights<br />Notice the higher profit margin<br />Source: IDC, Gartner, Strategy Analytics<br />
  33. 33. 16<br />Trends, Forecast and Insights<br />Shift from Desktops to Notebooks and Net Books (and Tablets)<br /> A really fake picture<br /><ul><li>10-inch multi-touch Tablet – LCD or OLED – new product family
  34. 34. Redefine the publishing industry
  35. 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. 36. Magazines/Newspaper online
  37. 37. Hybridized content that draws from audio, video and interactive graphics in books, magazines and newspapers</li></li></ul><li>17<br />Trends, Forecast and Insights<br />Bearish Factors<br />Eggs in one basket – desktop, portables, ipod revenues are dropping or flat, currently growth is only coming from iPhone<br />RIM, GOOG, NOK – strong competitors in smartphone market<br />Pricing - AAPL charges premium pricing compared to competition<br />Steve Jobs is no longer there<br />Black-Necked Swan type event <br />
  38. 38. 18<br />Key Parameters for Valuation - WACC<br />Current Capital Structure: Common Equity Only<br />WACC = (11.7 + 11.3)/2 = 11.50%<br />
  39. 39. Beta Calculations<br /><ul><li>Apple:
  40. 40. Annual Returns:
  41. 41. Nov 04-Nov 05: 119.81%
  42. 42. Nov 05-Nov 06: 40.79%
  43. 43. Nov 06-Nov 07: 134.27%
  44. 44. Nov 07-Nov 08: -43.36%
  45. 45. Nov 08-Nov 09: 75.20%
  46. 46. Mean Monthly Return: 4.14%
  47. 47. Mean Annual Return: 65.34%
  48. 48. Monthly Standard Deviation: 12.45%
  49. 49. Annual Standard Deviation: 71.12%
  50. 50. S&P 500:
  51. 51. Annual Returns:
  52. 52. Nov 04-Nov 05: 6.80%
  53. 53. Nov 05-Nov 06: 14.16%
  54. 54. Nov 06-Nov 07: 12.44%
  55. 55. Nov 07-Nov 08: -37.47%
  56. 56. Nov 08-Nov 09: 6.96%
  57. 57. Mean Monthly Return: -0.04%
  58. 58. Mean Annual Return: 0.58%
  59. 59. Monthly Standard Deviation: 4.61%
  60. 60. Annual Standard Deviation: 21.52%</li></ul>19<br />
  61. 61. 20<br />Key Parameters for Valuation - Beta<br />
  62. 62. 21<br />Discounted Cash Flow<br />25%<br />$250<br />$99<br />
  63. 63. 22<br />Discounted Cash Flow<br />iTablet<br />$500<br />
  64. 64. 23<br />Discounted Cash Flow<br />Highest: $652<br />Lowest: $127<br />Average: $284<br />
  65. 65. 24<br />Conclusion<br />Under-value or Over-valued : Blue Pill or Red Pill<br />If we believe <br />iPhone will keep up with innovation and grab market share from Nokia and others<br />GOOG will not bring out change the game substantially with Android<br />Company can function effectively without Jobs in future<br />iTablet (or whatever it gets named) will more than compensate for drop in desktop and portables growth<br />Then, AAPL is undervalued. The value should be closer to $240. <br />
  66. 66. 25<br />Resources for Valuation Analysis<br />Appendix<br />
  67. 67. 26<br />Resources for Valuation Analysis<br />Apple 10-K for past 5 years <br />Analysts Reports – S & P, Reuters<br />Trefis<br />AppleInvestor, AppleInsider, IDC, Gartner, NYT, Google<br />

×