Analyzing Apple

Alec is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Why Apple

Apple (NASDAQ: AAPL) is an incredible company. Starting out in a garage, Steve Jobs and Steve Wozniak created a vision that has lasted many years, and will continue to last deep into the future. Walking down the street or riding in the subway, everyone is using an iPhone, iPad, or iPod. A lot of people use Apple, and many people love their products (me included). As an investor, Apple is a type of business I would love to own, not because they are interested in making money, but because they want to change the world and make a difference. That is what I love to see in companies, because companies that are just there to make money have no motivation or moral emphasis on putting all their effort into a product or service. If I were to put all my money into Apple, I would, simply because I am confident in their mission and in their ability to affect people’s lives. I foresee Apple as a company that will last for a very long time as long as they continue to innovate.

Innovation is key

Before the Mac came out, people said that Apple was dead, and then Jobs and his team recreated the personal computer. Before the iPod came out, people said Apple did not have anything going for them, and then they recreated the entire music industry. Before iTunes, the iPhone, the App Store, and the iPad all came out, people thought that Apple was finished. As long as they continue to innovate and affect the market, Apple will be a winner in the long term.

Apple's moat

Apple has a huge competitive advantage from its competitors. The Apple brand symbolizes perfection, beauty, and products that are simple and elegant. Once you buy Apple, it is very difficult to switch to other platforms, mainly because of iTunes, the App Store, and the Mac App Store. You cannot switch Apple apps onto an Android or Mac Apps onto a Windows machine.

The one area Apple does fall behind on is its prices. Usually, Apple products are more expensive than some counterparts, but people are willing to pay extra for the brand, status, and the easy learning curve.


As for management, Tim Cook was handpicked by Steve Jobs to replace him. Cook is passionate about Apple, as is obvious when hearing him speak at Apple keynote events. He’s an honorable and honest CEO, as was seen when Apple messed up the Maps App on the iPhone, Cook apologized and told investors he made a mistake, rather than covering it up. Cook also has big plans for the company, with rumors of an Apple TV set to invade the living room. I think Tim Cook is an excellent CEO, and as long as he is at the helm, Apple will go in the right direction.

Valuing Apple

Onto the numbers: 

  • ROIC growth over the last 5 years is at 34%
  • Equity Growth over the last 5 years is at 50%
  • Sales Growth over the last 5 years is at 45%
  • Earnings Growth over the last 5 years is at 61%
  • Operating Cash Flow over the last 5 years is at 52%
  • Debt = ZERO!
  • Average PE over the last 5 years is at 15

As you can see, this company is growing very quickly. Return on invested capital, equity, sales, earnings, and cash flow are all going up a very high rate. Looking at just these numbers, giving the company a growth rate of somewhere between 30% and 50% is a reasonable assumption. However, the analyst earnings estimate for the next 5 years is only at 17%. Even though all the numbers are up, Wall Street seems to think Apple is dead. We’ve seen this before, and all Apple has to do is continue to do what they do best and Wall Street will come to their senses and give it an appropriate growth rate.

Let us say that Apple grows at 20% over the next 5 years (which is very modest for a company growing their earnings at 62% for the last 5 years). Growing their current income of $41.75 billion at 20%, 5 years from now Apple should be making $103.89 billion. Dividing this by the current shares outstanding (939.06 million), you get a future EPS of $110.63. Multiplying EPS by a PE of 15 (which is the historic average over the last 5 years), the Stock price 5 years from now, under these assumptions, would be $1,646.02. Right now, Apple is selling for about $450 a share. This scenario would represent a little bit more than a 29% return.

When to sell

I would sell Apple if major implications affected the company, such as:

  • If they decide to fire the current CEO, Tim Cook.
  • If they do not create a new product/market within a 5 year period (not including refreshes)
  • If they create bad products that don’t work or don’t meet the current standard of perfection
  • Other events that make Apple different than what it is today

So what is my point? Right now Apple is selling at a huge discount. I do not know why, and it does not matter. I have done my homework, I am confident in the Apple brand, its products, and its management team.

Credit: The method I used to value the company was based on Phil Town’s teachings.

aleceiber has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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