Wednesday, October 10, 2012

AAPL: Intrinsic Value Calculation as of Oct 9 2012


Here are my assumptions for AAPL, using the most recent financials:
1) 15% discount rate
2) 35bn Free Cash Flow (~12 trailing month)
3) 30% growth rate on free cash flow (vs the 90% visible rate, an enormous underestimate)
4) 20% haircut of non-cash assets from the balance sheet
5) 1 year worth of growth before terminal value (very likely an underestimate also)
6) 1.5% terminal growth, (~rate of inflation)

This gives an adjusted shareholder equity of ~ 85bn and a DCF valuation of ~405bn. Add them together, and I get 490bn, which is ~ $523 per share. (with very conservative parameters)
523 is a solid number. This tells me AAPL is not worth 100 bucks, and it's not worth 1500. Understanding that I've used very conservative parameters, I can safely say the "Price At Which I Can Expect To Achieve A Decent Rate Of Return Based On The Above Parameters" is in the area of 500 to 700.

The actual return is generated based on the price I pay, and the number of years that I hold it for. Using these particular numbers, Holding AAPL for 1 year and buying at 625 will get me a 7% ROI (per year), 15% (per year) ROI after 5 years. I'm pretty confident that the actual ROI's are much higher because of my use of extremely conservative estimates. I think that's well exhibited in my recent actual returns.

If you are following my trade tweets from twitter, you might have noticed that I've begun scaling into AAPL and have been making more aggressive trades.

I believe this is what Buffett meant when he said it's better to be partially correct than completely wrong. Buying at $625 when you have $523 as a reference number is partially wrong, partially correct. With NFLX, buying at $300 when you have $45 as a reference price is completely wrong, no excuses allowed. (similar calculations from the past)

You can reproduce this calculation by using the DCF worksheet here. You can establish a reasonable range of values by modifying the parameters around.

2 comments:

  1. How does your interpretation of discount rate as rate of return vs. the traditional definition of the rate, which is average weight cost of capital (WACC), affect your valuation?

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  2. Great question. WACC is different for different companies. The idea is that a less risky company should have would have a lower WACC. If you've read my other articles, I have a different philosophy. I see the discount rate as what I believe is an acceptable expected rate of return. A low risk company might have a WACC of 3% for argument's sake. However, if I'm going to take the risk of selecting individual companies, why should I aim for an expected return less than the market average? At 3%, I am better off putting money into an index fund, which will give me a higher expected return and diversification against mistakes. Therefore, it doesn't make sense to me to discount any company at a rate less than the market average. I know this this can remove whole sectors from my available investment choices but I think that is okay.

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