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Apple (AAPL) Stock: The Market Is Right – The Current Price Is Fair


Apple Store

Nikada/iStock Unreleased via Getty Images

Introduction

We consider that Apple Inc. (NASDAQ:AAPL) is a “hold” right now. In this article, I will provide evidence that the stock market price ranging between $130 and $170 per share year-to-date is moving around its intrinsic value; in other words, the current stock price is neither expensive nor cheap.

I will show a new perspective about the calculation of Apple’s intrinsic value that will help readers to understand why the stock price has not dropped as some bearish analysts might expect. First, I will use the DCF methodology for making projections of the current Apple’s products and services. Second, I will include the virtual and augmented reality products AR/VR in the calculation taking the assumptions made by one of the most reliable analysts about Apple – Ming-Chi Kuo from TF International Securities, and GlobalData Forecasts; the goal is to estimate a present value of the projected free cash flow (FCF) that would be generated by the AR/VR products that would be launched in 2023. Finally, I will add the effect of share buy-backs in the intrinsic value’s calculation.

I need to remind you that Apple stock should be seen as a long-term investment as Tim Cook clearly emphasized in the last TIME100 summit based on New York in June 2022, Tim Cook said:

If you are a short term trader, do not invest in Apple stock. Because if you are doing that, you are trading at a different time horizon than we’re investing in. We invest for the long term. Doing good is creating shareholder value in the long term; it may not in the very short term. Our interests are not aligned to the short term trader.

Context

Apple is facing some problems in one of the main Foxconn’s facilities which is the world’s largest iPhone factory located in Zhengzhou, China, due to the zero-COVID policy implemented in the country. This could affect the expectations of the analysts for the last quarter in 2022. However, the problem is not in the demand but in the supply as mentioned in the Apple’s web site in November 2022:

COVID restrictions have temporarily impacted the primary iPhone 14 Pro and iPhone 14 Pro max assembly facility located Zhengzhou, China. The facility is currently operating at significantly reduced capacity. As we have done throughout the COVID-19 pandemic, we are prioritizing the health and safety of the workers in our supply chain.

We continue to see strong demand for iPhone 14 Pro and iPhone 14 Pro Max models. However, we now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated and customers will experience longer wait times to receive their new products.

Furthermore, there are recent worrisome news about the protests in the Zhengzhou’s facilities with all the new recruited workers. However, Tim Cook has a strong specialization in supply chain management; in fact, that was one of the main reasons why Steve Jobs believed that there was anyone better than Tim Cook as his successor.

Therefore, we don’t have to be worried about the short-term issues mentioned on the news particularly if we are focused on a long-term horizon. In my opinion, a key factor is that Tim Cook has developed a long-term strategy in the company focused on delivering more value for long-term investors, which is reflected by the Apple stock’s capital appreciation of more than 600% in the last 10 years.

Given our focus on the long-term, I propose to calculate an intrinsic value considering the strong business model and the outstanding management; these two factors are key to make decent projections of the future FCFs to calculate Apple’s intrinsic value. Let’s see why this stock is at a fair price.

First stage: standard intrinsic value

In this part, I will show you that this is the typical way of calculation of the intrinsic value in several analysis using the DCF, considering a conservative growth in revenues and FCF of the company for the next years.

These are my assumptions for this stage:

  • Outstanding shares from 2021: 16,877,005,347
  • FCF margins based on the last 10 years average: 22%
  • Revenue growth of 3% for the next 6 years
  • Total debt and cash on hand in the balance sheet as of September 2022
  • Enterprise value is the subtraction of the total debt from the present value of the all the future FCF projected adding the cash on hand from the balance sheet.
  • Growth in FCF perpetuity (FCFP): 3%
  • Discounted rate: 8%

DCF_1

Prepared by the author

The estimations are conservative; for example, the growth of FCF has been 13.65% compound annual growth rate (CAGR) in the last 10 years while I am assuming 3% for my projections. The revenue growth expected from the consensus is 3% for 2023, 5.5% for 2024, and 5.1% for 2025; my estimations are 3% of revenue growth for all the years projected.



Read More: Apple (AAPL) Stock: The Market Is Right – The Current Price Is Fair

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