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Apple Inc: DCF Calculation Apple Inc. $AAPL

As stated in my last article I am looking to pick up some shares of Apple Inc. (AAPL) The other day I published Apple’s Cost of Debt, Cost of Equity and latest WACC. Based on those figures I have calculated a price target.

Valuation

In the section below, I will use the Discounted Cash Flow valuation model to estimate the current value of Apple’s shares as well as using the model to estimate future valuations.

I believe using the Discounted Cash Flow valuation model for Apple to be fair because DCF analysis can help one see where the company’s value is coming from and can generate an opinion based on that.

FY2017 FY2017 FY2018
FY 2016 TTM 2% growth EBITDA 5% growth EBITDA Analyst Estimates FY 2018
Operating Income $60,024.00
Taxes $15,685.00
Unlevered Net income $44,339.00
D&A $10,505.00
EBITDA $70,529.00 $71,939.58 $74,055.45 $79,440.00
Free Cash Flow $52,276.00 $52,276.00 $52,276.00 $52,276.00
WACC 6.92% 6.92% 6.92% 6.92%
Terminal Value 9.5X EBITDA $670,025.50 $683,426.01 $703,526.78 $754,680.00
Sum of Parts $722,301.50 $735,702.01 $755,802.78 $806,956.00
Net Present Value $675,553.22 $688,086.43 $706,886.25 $754,728.77
Total Debt $87,302.00 $87,302.00 $87,302.00 $87,302.00
Cash and Cash Equivalents $20,484.00 $20,484.00 $20,484.00 $20,484.00
Net Debt $66,818.00 $66,818.00 $66,818.00 $66,818.00
Equity Value $608,735.22 $621,268.43 $640,068.25 $687,910.77
Shares Outstanding 5500 5500 5500 5500
Price Value $110.68 $112.96 $116.38 $125.07
Current Price $113.95 $113.95 $113.95 $113.95
Difference -2.87% -0.87% 2.13% 9.76%

 

Even though there are variations in calculating this formula, this model is based off of a terminal value of $670,025.50B and a WACC of 6.92%. The terminal value $670,025.50B is based off of the company trading at 9.5X EBITDA. 9.5X EBITDA is above the industry average of 8.42X. I believe that this is fair as Apple is the leader in the industry and should trade at a premium within the sector. Using these valuations, I have concluded Apple’s value to be $110.68 per share.

As of December 9th, Apple’s stock was trading at $113.95 – using the Discount Cash Flow Formula above, this indicates the stock is trading at fair value to today’s price. Looking forward, as earnings are expected to continue their upward trend, I have calculated a long-term target in the $125+ range.

Risk

The way I see it is, one of the biggest risks to Apple Inc’s bottom line is the host of large tech rivals that look to under-cut Apple. Apple devices do sell at a premium thus many companies look to sell their devices at a reduced price looking to under-cut Apple’s products in order to cut into Apple’s market share.

Conclusion

In my opinion, at today’s valuation, I believe that Apple Inc is currently fairly valued. But looking forward, if the market continues to march on it’s upward trajectory, I see continued stock appreciation for Apple Inc’s stock price. At this point, I would buy the stock and not be too concerned if in the short term the stock price relaxes at bit. If I buy at these levels and hold for a couple of years I am sure I will be happy I did.

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