Apple Intrinsic Value

In this article I will calculate the intrinsic value of Apple (NASDAQ: AAPL)

About This Post

I am not going to explain what makes Apple a great company, it’s moat or it’s growth prospects. There are plenty of articles online about that. Instead, I am going to calculate the intrinsic value of Apple as a company. Then, you can decide if you want to buy the stock at today’s prices.

Let’s Start Without Looking

I like to calculate the intrinsic value of a company without looking at the stock price or market cap. Then, I compare the answer I come up with after. So, let’s dive in.

First, I find Apple’s free cashflow:

2022

111.4B

2021

93B

2020

73.3B

The three year average is $92.5B

Next, I find Apple’s book value and net cash:

Apple’s book value is $62.1B

Apple’s net cash is $55.8B

Now, I calculate Apple’s “intrinsic value”:

Apple is a great company, so I will use a discount rate of 10%.

$92.5B / .10 = $925B

If I was certain I would receive $92.5B in free cash flow forever if I bought Apple, and I wanted a 10% annual return, I would pay $925B for the company.

Then, I just add back the net cash, since presumably, Apple can operate without that cash. So, if I were to buy the entire business, I could take that net cash out immediately (therefore removing it from the purchase price).

$925B + $55.8B = $980.8B

So, we can say, the “intrinsic value” of Apple is about $981 if I don’t expect the company to grow at all (and if I want 10% annual returns).

Apple’s intrinsic value is $981B if it doesn’t grow earnings per share.

Of course, Apple has been growing earnings per share at about 29% a year for the past decade.

Now, let’s find out how the market is valuing Apple:

Now, that I have valued the company without looking, I’ll take a look at the market cap. It is $3.02T. That is $2.965T after subtracting the net cash.

$92.5B / $2.965T = 3% returns

So, if I am happy getting 3% returns AND I don’t believe Apple will grow at all, then I should pay $3.02T for the company.

The value of growth

I don’t know about you, but I don’t really want to make 3% on my money.

But, at the same time, I think Apple is going to grow.

Sometimes, value investors will “pay full price for the company and get the growth for free”.

So, in this situation, I think it’s important to model out growth.

To get 6% returns, Apple would need to double their free cash flow.

To get 12% returns, Apple would need to 4X their free cash flow.

Back in 2012, Apple was earning $1.58 per share. Today, they are earning $6.11 per share. That’s. nearly a 4X. So it is possible.

But… this is where investing is about more than math. The past doesn’t predict the future. So you’ll have to come up with your own analysis about Apple’s future growth prospects.

Can you see Apple earning $370B a year in the near future? All that growth to get just 12% annual returns doesn’t seem worth it.

The value of buybacks

The other interesting part of Apple’s valuation is their buybacks.

They had 26,470,000,000 shares outstanding in 2012.

Today they have 16,326,000,000 shares out.

That means they have bought back 10,144,000,000 shares back in a decade, or 38% of their shares outstanding.

That is 3.8% a year in buybacks.

If you believe the buybacks will continue at a similar pace, you can add the 3.8% onto your return.

Our free cashflow return is 3% + the return from buybacks is 3.8%.

So, 3% + 3.8% = 6.8% returns if we buy Apple at today’s prices and buybacks continue.

Apple Intrinsic Value — Final Answer

So, putting it all together, if I pay full price today, I get a 3% return.

Then, with buybacks I get another 3.8%.

If Apple doubles their earnings per share, I get another 3% — and this seems possible.

I would say my maximum return from buying Apple at today’s prices is between 3% at a minimum to 13% at a maximum. Likely, it’s somewhere around 7–8%.

What Is The Fair Value Of Apple?

I think a great price for Apple is around $1T. That gives me 9.8% returns with realistic growth.

It could still be a decent investment at $2T, if buybacks and growth continue over the next decade like they did over the past 10 years.

At $3T… I just don’t know… I am going to put it in the “too hard” pile. It is possible that it’s still a great investment — many people think so. But it seems very hard to make good returns at this price.

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