Tuesday, May 3, 2016

Another Simple Calculation for Apple

           In the last 12 months, including the most recent quarter, Apple had a total net income of $50,678 million.  Taking this as a fair estimate of the cash flow available to equity holders, which in the case of Apple it is close, we can do a simple calculation.  The one other necessary input for the calculation is the cost of equity capital.  Here a reasonable estimate is 8.5%.  (See Aswath Damodaran’s blog on valuing Apple for details related to estimating this number).
           If we assume that Apple’s earnings will be stuck forever at this number, the value of the equity can be approximated by 50,678/0.085 = $596,211.  This translates into a per share value of $108.80.  But that leaves out the cash and Apple has more than $35 per share in cash!  Furthermore, it is important to recognize that the earnings calculation was done in nominal terms – that is there is no adjustment for inflation.  If we assume that the long-run inflation rate is 2%, it means that in real terms the calculation assumes that Apple’s earnings will fall by 2% each year.  That seems like a very low bar for Apple to get over.  Nonetheless, it leads to a valuation well in excess of the current market price.  The simple calculation shows how deeply pessimistic the market is regarding Apple’s future.

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