AAPL valuation
Hi I'm doing a school case study on stock valuations and the assignment is to justify Apple's current stock price. I tried a lot but having a hard time justifying why AAPL is traded 28 times earnings / 8 times sales when it hasn't shown any significant sales growth since 2016 other than the COVID induced boost. I thought stocks' valuation are based on how much profit they will eventually generate, which depends on their earnings and expected growth (and other factors such as macro). How do I go about justifying APPL's stock price?
Not going to give you the answer, but be more forward-looking. Are there any trends or big "themes" right now that have people excited about the longer-term (terminal value) of the company's growth? Could be AI or something.
Also, focus on earnings, as well as sales. Even if sales growth is sluggish, what has happened to margins? I think a lot of the bull/bear debate around the name has been their ability to shift to becoming more of a software company. How has this acceleration of business mix affected multiples? How is this impacting costs and capital intensity?
I don't cover AAPl
Real hedgies running circles around high schooler, you can't find that elsewhere. Love it.
You'd be surprised, there's some phenomenal talent out there still at school. Kid at college I mentor can literally run circles around most IB applicants we interview lol
OP is likely a college student
Those are great points, thanks a lot. I gave it some more thought, I think I have a better understanding now.
Their EBITDA margin has improved from around 28% to 34% since 2020. Although it was around 38% in 2012 and drifting down until 2020.
Their attemp at being packaged as a software company is encouraging, although what's a bit puzzling to me is that there are already very strong software companies (Google for example) which are trading on cheaper multiples, so that tells me that aspect is perhaps more than priced in already.
The terminal value is an interesting one. If all goes well for Apple they will dominate the software ecosystem, but frankly I think the other extreme is much more likely, i.e. them losing the battle to the open source model in the long term. I think the most likely outcome is that they will gradually "cave in" over a very long period of time hurting their margins.
Cool, go find the data points that support your story and you'll be set.
Imagine they sell 100m Vision Pro Units / Year at $2000 ASP. That's $200b incremental revenue, slap a 35% NI margin on that and you got +70b in profit on 100b base. Note annual iPhone shipments are 200m-250m. Then add whatever profit they get from the Vision Pro App Store, which will be super high margin.
If you believe this story, it's not hard to get very high future profits.
100M Vision Pro sales per year? They’ve only sold 200k so far and are projected to sell 400k in 2024, and then 1M in 2025 and 4M in 2026. VR/AR sales just aren’t on the level of phones at all. For reference, Meta has only sold about 20M Meta Quests lifetime, and they’re a fraction of the price as well as the industry incumbent. Fact is, the Vision Pro will not be a massive driver of earnings for Apple for at least a few years, and even then, it would be quite the feat to generate 100M sales per year. That’s also assuming they either get the price down significantly or that 100M people have $3,500 to spend on this every year. Both massive assumptions at this time.
Even in that case, that’s so far out that assuming you’re discounting this at the proper discount rate per year until they reach these sales figures, it really adds a negligible figure to their discounted value of all future cash flows, which is what ultimately matters when discussing a “fair” valuation for AAPL. I get that your case is purely hypothetical, but I’m just offering my hypothetical rebuttal in turn
Ok, I'm happy being on the other side of your trade
As someone who just bought a bunch of AAPL, I took this post personally.
Whats hilarious to me is how many are trying to justify the valuation with a fundamental response. The price moved and now everybody is trying to justify a multiple far outside the historical range with a reverse engineered thesis on why it could go even higher.
AAPL is a $3T company that has been an outsized beneficiary from the excess liquidity in the market and passive index buying to market cap weighted indices (QQQ). Do you think its a coincidence the other mega cap names are trading at huge valuations? Do you think they all had a revolutionary, market valuation shifting transformation since the +50% QQQ run after the fed backed off?
Obviously u have macro conditions that drive the market no one is saying the opposite read again.
The question is why Apple is one of the biggest market cap and has a valuation premium over hardware stocks
All stocks in the S&P have benefited of the liquidity, yet there are crazy valuation differences due to fundamentals. 3yrs of xp u should understand that.
Giving u a few examples to help u understand:
Why other hardware companies like HP or Cisco are not 3 trillion but Apple is ?
Why Apple hugely overperformed Amazon over the last few years (+200% overperf over 5Y). Don't you think Amazon benefited from the excess liquidity ?
Do u look at Nvidia ? Stock is rising 10 times faster than the index, is it due to passive investing and excess liquidity ?
Well the Amazon argument primarily comes down to starting valuation but you are attempting to hand wave that away so perhaps you could give me a better reason?
I don't understand what u mean by starting valuation. Amazon and Apple had the same market cap 5Y ago.
Looking at the top stocks 5Y ago we see a high discrepencies in returns:
Stock. Mkt cap 02/19 Total perf 02/19-02/24
Microsoft 851. 294%
Apple. 815. 338%
Amazon. 801. 106%
Google. 774. 152%
Berkshire. 496. 97%
Meta. 462. 190%
J&J. 364. 33%
Again talking about Nvidia that was 100bn 5yr ago and far from this top group. And is now top 5th biggest market cap thanks to its huge return over 5Y.
Extending the analysis with stocks that had a market cap between 90/110 bn 5y ago. I count 20 stocks. Their returns range from 18% for Altria to 1,666% for NVIDIA and second one is Broadcom with 411%.
All these stocks had a similar market cap so they all benefited from passive inflows to the same extent and yet u see a wide range of performance due to fundamentals.
Now if I look at the top 5% performers of the S&P 500 (that is 25 stocks), the biggest starting market cap: Apple with 811bn and then Eli Lilly with 127bn market cap.
The other 23 stocks average market cap is 24bn$. So the best performing stocks are mid caps and their overperfrmance over the index is due to fundamentals and not passive flows/liquidity.
Finally I do a correlation between market cap 5Y ago and returns and.... Tada 3%, which is statistically 0.
I won't spend more time doing basic stats to show u that dispersion among stocks is due to fundamentals differences. (Sector also plays a huge role).
Best luck to you investing
Not a discretionary guy but a quick look on Bloomberg
I would not say they have no growth:
Revenue 2016 215bn$, 2023 383bn$
EPS 2016 2.08$ 2023 6.13$, expected EPS growth for the next few years 8% per year
I see PE the S&P hardware index ex-Apple at 24 so small premium to the sector but nothing crazy
S&P software index valuation is at 37 and as said Apple do also software
Other qualities:
No debt
Super low CAPEX so FCF~EPS
Plus as was said AI hype, decent pipeline of new projets/products, investors belief than they can keep innovating
Brand??? You mf nerds only look at numbers ofc it's gonna seem hard to justify.
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