So I have decided to do a series of articles on security analysis. I am planning this as a learning experience and any feedback would be greatly appreciated. A proper analysis of a stock is a constant process whereby as new information comes up a new review of the security must occur. Also, the more fundamental research and understanding you have of the company the better your analysis will become. I myself have yet to finish listening to all of the quarterly earnings calls from Tim Cook so I think a prompt update to this article will be due soon. Moats of Safety Apple is the largest company, by market cap, in the world. It is there because of its many Competitive Advantages that have propelled it forward. The one that should be the most appealing to the investor is the Gross margin of 40%. The moment I saw this I realized I needed to delve in further into the quarterly earnings. Given that eventually there is a likelihood for the gross margin to fall there are many other intangible assets that pad AAPL as a business. The brand and advertising schemes AAPL has enlisted has transitioned the IPhone from a technological innovation to a must-have consumer item. We see evidence of this with the IPhone 7 which is not the technological innovation it once was but has still beaten sales expectations of the product. The biggest discrepancy between Wall street analysts and the value of AAPL is they are either relying on Tim Cook being crazily bad at his job, a sudden catastrophe in earnings which seems less likely with the latest 1st quarter of 2017, or $200bn not being utilized towards a corporate event such as an acquisition or being grown likewise through investing or other activities. This amount of cash, means that we should, in the coming DCF model decrease the discount rate to account for 2/7 of the market cap being in cash or marketable securities (that could be liquidated into cash for an activity). The DCF Model I do not expect AAPL to have positive growth going forward. I think there will be a slight, but not a major, decline in revenue at least from the main product; the IPhone. I have not accounted for the cash that AAPL holds because I can't forecast what AAPL will do with it. To compensate with this I have lowered the discount rate to 5% (so the risk premium is around 3%). I have also been conservative with the growth forecast of around -3%. Given that my valuation of AAPL is around $155. This provides a margin of safety of around 20% from the current trading price which for some value investors is not much in terms of risk aversion. Having said this, I believe there is additional risk aversion in the intangible side of AAPL as well as the cash. DCF model (in progress) on google sheets. There is still a lot to add but I am currently focusing time and energy on a new security. There seems to be enough detail and conservative variables for a value investment opportunity to be present. The Trump Factor Trump is a volatile president. Carl Icahn left AAPL, his reasoning being "China" which seems in my opinion dubious. Even without AAPL within the next 5-15 years automation will be almost as cheap as outsourcing industry towards China. Not only this but if Trump does do some weird tax against multinational companies utilizing cheaper workforce in developing countries I think that AAPL will still do fine as Trump would also lower the tax rate to 20% which would be more beneficial if the gross margin for AAPL say went to 30% instead of 40% and the tax rate from 26% to 20% for shareholder equity. Shareholder Value AAPL have a $175 billion share buyback program. Recently AAPL have started increasing the dividend payments to shareholders indicating further shareholder value here. Catalyst The current share price is not significantly undervalued (with enough margin of safety to warrant it becoming the highest position on a portfolio). That being said it is still a good buy / hold on a diversified portfolio being a smaller position in consideration of some of the risks that genuinely pose a threat to AAPL if growth falls below -3% annually. Conclusion Buy / Hold. Target Share Price: $155. Current Share Price: $130. Originally recommended @ $95 I originally brought this stock to the attention of the community in one of my first trade journal posts. If, by chance, anyone did listen to that advice they would be doing quite well now. I still think there is some value to be found in AAPL albeit not as exceptional now since the price has increased substantially.
Nice post, I made a copy of it and put it in the AAPL thread as well so anybody watching AAPL will see it. I'll leave this one open for you as well.
Nice work Alexander. What impact do you think it will have on Apple if Trump carries through with his promise to allow companies to move their money from overseas back to the US without penalty? Apple has a lot of cash they could bring back in. Might that change the valuation if that does in fact happen?
Trump is too reckless to forecast. From a cash perspective I view it as an asset to AAPL regardless. A large portion of the cash I mentioned is in actual fact long-term marketable securities. Thank you for your input though I will consider this. I am currently doing a valuation of GOOGL. I am sleeping like 4-5 hours right now and attending school so I am very tired For me the more interesting of trumps many rambles is the tax rate. If the tax rate were to fall from 26% to 20% the net present value would go to $170 if the gross margin stayed the same. I don't think that will be the case as the gross margin is a side effect of AAPL being a multinational company utilizing China's cheap workforce. Which is better, a slash in tax rate or in gross margin from 40-35/30? From the model I have used it would seem like the tax cut would be more beneficial for shareholder value.
Seems like I called it (only joking) In the latest quarterly filings of investments berkshire hathaway (Warren Buffett's holding company) has increased its position in the company by 270%. For me, this is all the proof I need to know my due diligence was accurate (enough to the extent that arguably the world's greatest investor invested in it). I found a very interesting comment on Apple by Michael Burry (from the big short): What tells me Apple is a Buffett stock can be summed up in recent events. Analysts expect the new iBook to retail for 1299. Apple jumps the price 30% to 1699 and gets some criticism for the price at the same time analysts are saying “they’ll sell as many as they can make.” If this isn’t market power, I don’t know what is. To look at all box makers, lump them in one group, and say Apple has only this much percent is the wrong way to look at it (even so, the share is growing, not declining). To say that corporate IS isn’t going to rally behind Apple is also missing the point. This is a consumer franchise, not a corporate one. And I think Buffett’s point has always been that in the long run it is the consumer franchises that last. There is not another box-maker out there that could pull off what Apple is doing. No, not even Dell, jhg. That software makers (including Microsoft) are once again pouring resources into Apple development at breakneck pace is another clue as to the longevity here. Plus, you have all of Wall Street trained to think that Apple is the antithesis of good business thanks to case studies from the 80s. How can you go wrong? Please bare in mind this wasn't a recent comment just a very ironic one from the time when I was reading it.
