Calculating The Intrinsic Value Of Apple Inc. (NASDAQ:AAPL)
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Using the 2 Stage Free Cash Flow to Equity, Apple fair value estimate is US$247
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Apple’s US$254 share price indicates it is trading at similar levels as its fair value estimate
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Our fair value estimate is similar to Apple’s analyst price target of US$246
Today we will run through one way of estimating the intrinsic value of Apple Inc. (NASDAQ:AAPL) by taking the expected future cash flows and discounting them to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won’t be able to understand it, just read on! It’s actually much less complex than you’d imagine.
We generally believe that a company’s value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
See our latest analysis for Apple
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:
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2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
|
|
Levered FCF ($, Millions) |
US$123.7b |
US$131.3b |
US$158.4b |
US$175.8b |
US$189.5b |
US$200.1b |
US$209.5b |
US$218.1b |
US$226.1b |
US$233.6b |
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Growth Rate Estimate Source |
Analyst x12 |
Analyst x13 |
Analyst x4 |
Analyst x2 |
Analyst x2 |
Est @ 5.62% |
Est @ 4.72% |
Est @ 4.09% |
Est @ 3.65% |
Est @ 3.34% |
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Present Value ($, Millions) Discounted @ 7.4% |
US$115.2k |
US$114.0k |
US$128.0k |
US$132.3k |
US$132.9k |
US$130.7k |
US$127.5k |
US$123.7k |
US$119.4k |
US$114.9k |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.2t
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.6%. We discount the terminal cash flows to today’s value at a cost of equity of 7.4%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$234b× (1 + 2.6%) ÷ (7.4%– 2.6%) = US$5.1t
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$5.1t÷ ( 1 + 7.4%)10= US$2.5t
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$3.7t. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$254, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company’s future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at Apple as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we’ve used 7.4%, which is based on a levered beta of 1.148. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Strength
Weakness
Opportunity
Threat
Whilst important, the DCF calculation shouldn’t be the only metric you look at when researching a company. It’s not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to “what assumptions need to be true for this stock to be under/overvalued?” For example, changes in the company’s cost of equity or the risk free rate can significantly impact the valuation. For Apple, we’ve compiled three essential aspects you should explore:
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Risks: To that end, you should be aware of the 2 warning signs we’ve spotted with Apple .
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Future Earnings: How does AAPL’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
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Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.