Tuesday, July 11, 2017

A DCF for Apple

      Despite the amount of time I have spent discussing it, Apple is actually a suprisingly easy company to value for two reasons.  First, it has a lot of cash whose value is unambiguous.  Second, the company has grown so large that it reasonable to expect it to mimic the aggregate economy.  That is the assumption I build into my DCF.  I project 10% growth in 2017 based on the introduction of new iPhones, but after that expected growth is equal to that projected for the U.S. economy.

      To be sure Apple could surprise on the upside with new innovations.  But it also could surprise on the downside if innovation slows and margins contract.  Remembering that DCF models rely on expected values, the assumption of mimicing economy growth seems like a good one.

       Using that growth rate and a discount rate of 9.00%, the value of Apple comes to $172.  A bit higher than the market price, but not exceptionally so.  As always, I urge my readers to play with the assumptions.  Relatively small changes in expected growth or the discount rate can have a meaningful impact on the final valuation.

Apple DCF

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