When I first wrote about Apple (which was only about 6 months ago), they had just became the first U.S. public company to hit a 2 trillion dollar market cap. Although they are not the most valued company at the time of this writing, their market cap has already gone up to a staggering 2.5 trillion. Let's take another look at their story and some numbers.
What does Apple do?
Apple Inc started out by designing, manufacturing, and marketing personal computers in 1977. Since then, they have added smartphones, tablets, wearables, and accessories to their product line. They also sell various related services. Some of these services include Apple Care, Cloud Services, Digital Content, Apple Arcade, Apple Music, Apple News+, Apple Card (credit card services), Apple Pay (cashless payment service), as well as others. The iPhone is by far the most popular product.
Revenue
Apple has seen incredible growth in revenue over the years. A lot of this growth is due to the expanding product line and Apple's ability to continue to innovate.
As shown in the chart below, Apple's revenue has grown from $19 Billion in 2006, to a staggering $365 Billion in 2021. This equates to an compound annual growth rate (CAGR) in revenue of 22% over 15 years. A 10-year CAGR of 13%, and a 5-year CAGR of 11.15%. In the last 20 years, there has only been 2 years that have seen a dip from the previous year; 2016 and 2019.
In the next chart we will look at the breakdown of revenue sources, their margins, and the trends for each source.
As you can see the iPhone is still by far largest revenue generator for Apple, which seen a nice boost in 2021 due to the release of the iPhone 12 and 13 during this reporting period. Revenue from Services has been on a steady incline. It has seen a 5 year CAGR of 22.96%, with 1 year growth of 27.26%. This is what most excites me about Apple as their revenue from services has a much higher gross margin then products (in 2021 this was 69.7% for services vs 35.1% for physical products).
Margins
Here is a quick look at the margins of Apple over the last 20 years. For the year of 2021, Apple had a gross profit margin of 41.78%, operating margin of 29.78%, and net margin of 25.88%. This represents significant increases over the 2020 numbers of 38.23%, 24.14%, and 20.91% respectfully. This increase is due to the increase in revenue from services, different product mix, and strength in foreign currencies relative to the US dollar.
Apple's margins constantly have a downward pressure due to competitors, but have managed to remain quite healthy.
Earnings
Apple’s earnings have seen steady growth as well. In 2021 they had net income of $94.58 billion, which represents a 64.91% increase Y/Y. Their 5 year CAGR (compound annual growth rate) is 15.69%, and the 10 year is 13.83%.
We've also included a chart showing the price to earnings ratio, as of the day the annual reports come out. At the time of this writing the price to earnings ratio was 26.82.
Analysts predict growth over the next 5 years of 15.43%.
Free Cash Flow
Free cash flow is one of the most important metrics when valuing a company. It is essentially the amount of cash left after paying all obligations. It is often used to determine the financial health of a company, as well as for the discounted cash flow valuation method, which attempts to predict the future cash flows of a company, then discounts it back to the current date. Because free cash flow takes into account changes in working capital, you can often catch issues with a company before they show up in revenue/earnings.
As you can see as of Apple's last annual report, September of 2021, they had a FCF per share of $5.57. This gives them a 10-year CAGR of 17%. Over the last 5 years it is 18.43%.
Dividends/Share Buybacks
Apple's dividend has been consistently growing. They have never cut the dividend. In April 2021 Apple announced an increase to it's share repurchase program, authorizing $315 billion in share buybacks. It also increase it's quarterly dividend from $0.205 per share up to $0.22 per share, with plans for future increases on an annual basis. During 2021 Apple repurchased $85.5 billion worth of common stock.
| 2021 | 2020 | 2019 | |
| Common stock outstanding, beginning balances | 16,976,763 | 17,772,945 | 19,019,943 |
| Common stock repurchased | (656,340) | (917,270) | (1,380,819) |
| Common stock issued, net of shares withheld for employee taxes | 106,363 | 121,088 | 133,821 |
| Common stock outstanding, ending balances | 16,426,786 | 16,976,763 | 17,772,945 |
Valuation
We are going to be using a discounted cash flow calculation using our DCF calculator to come up with our intrinsic value. Remember that everyone will come up with a different intrinsic value, depending on their story for the company. We will walk through each step for full transparency of how we get to the end result.
Revenue
For revenue we are going to look at the recent trends, analyst forecasts, and the annual reports to estimate what we think the revenue will be going forward. During the last 5 years, Apple has seen CAGR of 11.15%. For forecasts we will look at YahooFinance and Zacks.com. According to YahooFinance analysts are predicting 4.3% revenue growth next year, 4.4% the year after, and 5 year growth of 15.43% per annum. Zacks on the other hand predicts 5.34% year one, 6.37% year 2, and 5 year growth of 12.5%. Apple's revenue has largely depended on the iPhone in the past, and despite their revenue from services growing, I largely expect that to remain the same for atleast the next few years. That means roughly every 3 years I expect a spike in revenue, with the years in between lagging. For revenue growth in perpetuity we will be using the risk free rate, which we use the 10 year treasury bond yield for.
Year 1 Revenue: 5%
Year 2-5 Revenue (per annum): 6%
Revenue Growth in Perpetuity: 1.68%
Operating Margin:
Despite Apple facing increasing competition, I believe their margins will remain strong. Their increasing revenue from services (with higher margins) will be a large factor in that. Looking at the recent trend, over the last 10 years Apple's operating margin has seen a range from 24.44% to 35.63%. The average over the last 5 years being 27%.
Year 1 Operating Margin: 27%
Year 10 Operating Margin: 28%
Marginal Tax Rate:
We are using the marginal tax rate as we assume the company will eventually have to pay it. You can choose a lower or higher number if you think their effective tax rate will continue to be lower/higher due to credits, tax deductions, foreign taxes, tax code changes, ect. The danger with that is maintaining consistency throughout valuations.
Marginal Tax Rate: 25%
Sales To Capital Ratio:
Sales to capital is an efficiency ratio showing how much invested capital is needed for each dollar of revenue. This has been increasing over the last 5 years for Apple. In 2021 it was 2.92, and the 5 year average is 2.35.
Sales To Capital Year 1: 2.9
Sales To Capital Years 2-5: 3
Sales to Capital Years 6-10: 3.3
Cost of Capital:
Cost of capital is a bit of a complicated calculation the first few times you do it. For a more in-depth guide on how to calculate it check out our DCF Guide. Though important as a hurdle rate/opportunity cost, it is not as crucial as the growth estimates. Here are the numbers we are using for our cost of capital:
Cost of Debt: 2.86% (we're using this as the most recent long term debt issued by Apple has a range of 1.43%-2.86%)
After Tax Cost of Debt: 2.145% (calculated by multiplying 2.86 by 1 minus marginal tax rate of 25%)
Weight of Market Debt: 0.0758 (201.8 Billion(Debt notes, purchase obligations, lease obligations) divided by 2.6618 trillion(debt+equity))
Implied Equity Risk Premium: 4.53% (Latest Implied Equity Risk Premium calculation)
Beta (5 year): 1.2 (We grabbed this from the 5 year beta for Apple)
Risk Free Rate: 1.68% (latest 10 year treasury bond rate)
Cost of Equity: 7.116% (Calculated as 4.53% x 1.2 + 1.68)
Weight of Equity: 0.9242 (2.46 Trillion(Market cap) divided by 2.6618 Trillion(debt+equity))
Cost of Capital Year 1: 6.74% (Calculated as 7.116% * 0.9242 + 2.145% * 0.0758)
Cost of Capital Year 10: 6.18% (According to Aswath Damodaran, mature companies generally reach the average cost of capital, which is 4.5% + RFR(1.68%))
Finally we have come to our intrinsic value. For our assumptions we have come up with an intrinsic value of $125.88. Depending on your story/forecasts for the company, you may come up with a higher or lower number. Let us know in the comments!
Conclusion
Apple is a great long term company that we believe will be around a long time. They continue to innovate, have had good growth, good leadership, and a loyal base. As shown in the previous paragraph, we have personally determined Apple to be worth somewhere around $128 per share based on our personal assumptions for their future. We believe their percentge of revenue from 'services' will continue to rise, which will hopefully help offset any downward pressure on margins from competitors. They have also publically stated their intention to continue share buybacks with their free cash, which is good news for shareholders, particularily if they wait till dips in the market to buyback.
How do you predict Apple will grow over the next 5 years? How about the next 10? Share in the comments if you're currently buying, and if not, what price would you start a position at?
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