Course Name: Investment Banking and Financial Markets

Apple Valuation Assignment

How would you describe Apple’s business? How is Apple doing financially? What ratios
would you use to evaluate Apple’s financial health and performance? How would you
determine if these ratios are “good” or “bad”?
• Apple’s Business: Apple specializes in the development, manufacturing and sales of
personal computers, servers, peripherals, computer software, online services and personal
digital auxiliary equipment. Apple is still a product company since the majority of the
revenue comes from hardware products such as the iPhone, Mac, iPad, etc. However,
services revenue is growing rapidly as we all aware. While the Americas remain a major
revenue contributor, other regions are growing rapidly.

2019 Revenue by Product Segments 2019 Revenue by Geography

Rest of Asia Pacific

7%
Services
Japan
18%
8%

Wearables, home Greater Americas

and accessories China 45%
9% iPhone 17%
iPad 55%
8%
Mac
Europe
10%
23%

(Exhibit 1A) Source: AAPL Annual Report, 2019

• Financial Performance: Apple’s revenue has been growing steadily over the years. The
service business volume and the proportion in the company's total revenue have increased
significantly, which is a sign that shows that the company is actively transforming into a
service-oriented business. This transformation will give Apple more stable and recurring
revenue streams. I have selected a few metrics to reflect the company’s financial
performance. We can see that Apple’s ROE has been steadily improving while EBITDA and
Net Profit Margin have been relatively stable. We can tell Apple’s management is using the
company’s operational expertise and assets to create profits in an extraordinarily effective
way with product innovations, service transformation and organic and inorganic growth.

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 Course Name: Investment Banking and Financial Markets

Apple's Revenue Growth by Segment

300. 20.0%
18.0%
250.
17.8% 16.0%
14.0%
200.
14.5%
12.0%
13.1%
150. 10.0%
11.3%
9.4% 9.9% 8.0%
100. 8.2% 8.5%
6.0%
4.0%
50.
2.0%
0. 0.0%
2012 2013 2014 2015 2016 2017 2018 2019

iPhone Mac iPad Wearables, home and accessories Services Services Revenue Percentage

(Exhibit 1B) Source: AAPL Annual Reports

ROE, EBITDA Margin and Profit Margin

60.0% 55.9%

49.4%
50.0% 46.2%

36.9% 36.9%
40.0%
35.3%
32.7% 31.2%
30.0% 30.8% 29.4%

20.0%
22.8% 22.4%
21.2% 21.1% 21.2%

10.0%

0.0%
2015 2016 2017 2018 2019

Return on Equity (%) EBITDA Margin (%) Profit Margin (%)

(Exhibit 1C) Source: AAPL Annual Reports

• Financial Health & Performance:

I would mainly use five different categories of ratios to comprehensively evaluate the
company’s financial health and performance.

1. Profitability Measures: ROA, ROC and ROE help assess the company's ability to
generate income relative to its revenue, operating costs, balance sheet assets, or
shareholders' equity
2. Margin Analysis: Gross Margin, Cost of Revenue Margin, EBITDA, EBIT Margin and Net
Income Margin analysis gives a view of the benefits gained by the cost of operational

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 Course Name: Investment Banking and Financial Markets

activities and how the company’s profitability changes according to take those
activities.
3. Asset Turnover: Turnover ratios such as Total Asset Turnover, AR Turnover, Inventory
Turnover, etc. give a view about how efficient the company with its assets to generate
revenue. DSO, DIO, DPO and Cash-Conversion Cycle are also effective measures for
evaluating the efficiency of the company’s core operating activities.
4. Liquidity Metrics: Current Ratio, Cash Ratio and Quick Ratio is an indicator of the
company’s financial health, reflecting how quickly AAPL can utilize its funds to cover
the outstanding current liabilities and bills.
5. Solvency Metrics: Metrics such as Debt-to-Equity, Debt-to-EBITDA and EBIT / Interest
Expense demonstrate the company’s capacity to pay its long-term liabilities, such as
debt and interests. Total Liabilities-to-Total Assets shows the degree of leverage and
the company’s financial stability.

As a summary, those metrics can be used to assess the company’s financial health and
performance. However, simply looking at the figures that the ratios give us does not tell
anything. We have to look at the trends and changes of those metrics over the years and even
doing so is not enough. We should benchmark the ratios against the industry average and more
close competitors that have a similar business model and capital structure to judge how good
or bad those ratios are and how well the company’s financial health and performance is.

How much debt does Apple have outstanding? How much cash & marketable
securities does Apple hold in various forms? What does this tell us about Apple’s
financial health? What does this tell us about Apple’s capital structure?
• Debt Outstanding: According to the AAPL’s financial statement provided, by the end of
September in 2019, the book value of debt was 118,447.0 million USD.
• Cash & Marketable Securities: According to AAPL’s financial statement provided, the book
value of cash & marketable securities is 100,557.0 million USD held in various forms
(marketable securities portfolio is primarily invested in highly rated securities, along with
commercial paper and other short-term liquidity arrangements.) According to the 2019
annual report of the company, the line item will be sufficient to satisfy its working capital
needs, capital asset purchases, dividends, share repurchases, debt repayments and other
liquidity requirements associated with its existing operations over the next 12 months. It
represent about 30% (≈100,557.0/ 162,819.0) of company’s total assets. Apple is in
incredible financial health, which means that the company has an amazing margin of safety.
For example, not like many other companies with Apple’s scale (in terms of employee size,
market share, etc.), if the company needs to make big CAPEX such as property plant and
equipment or acquisitions for its business needs, the company does not need to raise debt
and easily fund these activities with cash. Debt would be less of a concern for Apple,
Meanwhile, because of the similar reason, Apple will enjoy favourable credit ratings, which
enables Apple to have extremely low borrowing rates and earn substantially higher returns
on international marketable securities.

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 Course Name: Investment Banking and Financial Markets

According to its financial statement, Apple has been buying back shares of its common stock
benefiting from its cash-rich position, so Apple has a high amount of ownership of the
company. Apple’s Debt-to-Equity ratio is 119.4%, which has risen from 53.9% in 2015,
which means that Apple’s capital structure has been changing rapidly.

What is Apple’s net debt? What is Apple’s enterprise value (EV)? What is their multiple
of EV to last 12 months EBITDA? How does this compare to other firms in the industry?
• Net Debt: According to AAPL’s financial statement provided, by the end of September in
2019, the company has 7,490.0 million USD of net debt.
• Enterprise Value (EV): EV is calculated as

EV = Common Shares + Preferred Shares + Market Value of Debt + Minority Interest – Cash
and Equivalents

Apple’s EV is 1,112,796.6 million USD.

• LTM EBITDA is calculated as

LTM EBITDA = (Prior Fiscal Year + Current Stub - Prior Stub) of EBITDA

So LTM EBITDA equals to 76,477.0 million USD, and EV/LTM EBITDA = 14.6x.

According to the multiples (Exhibit 2) that I chose for the company, Apple’s EV/LTM EBITDA
multiple is on par with the industry average.

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 Course Name: Investment Banking and Financial Markets

Company Name EV/LTM EBITDA

Microsoft Corporation (NasdaqGS:MSFT) 18.0x
NetApp, Inc. (NasdaqGS:NTAP) 8.4x
Samsung Electronics Co., Ltd. (KOSE:A005930) 3.7x
AT&T Inc. (NYSE:T) 7.7x
HP Inc. (NYSE:HPQ) 5.6x
Dell Technologies Inc. (NYSE:DELL) 9.4x
Western Digital Corporation (NasdaqGS:WDC) 12.0x
Hewlett Packard Enterprise Company (NYSE:HPE) 5.5x
Xiaomi Corporation (SEHK:1810) 18.2x
Lenovo Group Limited (SEHK:992) 6.1x
Tencent Holdings Limited (SEHK:700) 22.4x
Facebook, Inc. (NasdaqGS:FB) 16.8x
Alibaba Group Holding Limited (NYSE:BABA) 25.3x
salesforce.com, inc. (NYSE:CRM) 44.8x
VMware, Inc. (NYSE:VMW) 23.9x
SAP SE (XTRA:SAP) 20.1x
Alphabet Inc. (NasdaqGS:GOOG.L) 16.2x
Amazon.com, Inc. (NasdaqGS:AMZN) 23.6x
Oracle Corporation (NYSE:ORCL) 12.1x
Sony Corporation (TSE:6758) 6.6x
Adobe Inc. (NasdaqGS:ADBE) 37.6x
Cisco Systems, Inc. (NasdaqGS:CSCO) 12.6x

High 44.8x
Low 3.7x

Medium 16.2x
Median 14.4x
(Exhibit 2) Source: Desktop Research, CapitalIQ

What cost of debt would you use in Apple’s WACC? Where can you find it? Which tax
rate should you use for Apple’s WACC? Justify your choice. What is Apple’s cost of
equity? Where can you find it? What do you get as your estimate for Apple’s WACC?
• Cost of Debt: For the cost of debt, I used the average base rate of the first seven bonds and
notes in the Capital Structure Details sheet, which is about 1.86%. I assumed that the given
data in 2019 serves as the best indicator of its expected cost of debt and reflects the risk of
default.
• Tax Rate: Apple’s effective tax rate is in decline due to the lower tax rate on foreign earnings
and tax benefits from share-based compensation (according to Annual Report 201Tor to
estimate conservatively, I used a tax rate of 22.15% calculating from the average of the
effective tax rate from 2015 to 2019.
• Cost of Equity: Apple’s Cost of Equity is 10.10%. To calculate the cost of equity, I calculated
beta, Risk-Free Rate of Return (RF) and Return on the Market (RM ) accordingly.
o I researched 10-Year Treasury Constant Maturity Rate for Risk-Free Rate of Return
(RF), which I learned from online sources, such as the US Federal Reserve the and
Department of Treasury.
o I used the S&P 500 Market Return - Yearly Average for the Last 10 Years for RM
based on my research on Yahoo Finance as follows (Exhibit 3), which provides me
MRP of 11.09%.

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 Course Name: Investment Banking and Financial Markets

Index Returns Annual Return

2019 28.90%
2018 -6.20%
2017 19%
2016 9.50%
2015 -0.70%
2014 11.40%
2013 30%
2012 13.40%
2011 0.00%
2010 12.80%
Average 11.81%
(Exhibit 3) Source: Desktop Research, Yahoo Finance
o Levered Beta for the company is 0.898, calculated from the data provided in the
excel from Bloomberg and other comps as follows:
Beta Calculation
5 Year Average Levered Beta Mkt. Val. Preferred Unlevered
Total Debt Debt / Equity Pref. / Equity
Comparables Tax Rate (2Y Raw Beta) Equity Equity Beta
Dell 0.00% 1.534 55,771.00 48,275.30 0.0  115.53% 0.00% 0.712
HP Enterprise 24.30% 1.310 20,550.00 12,336.40 0.0  166.58% 0.00% 0.579
HP Inc. 26.00% 1.306 7,418.00 26,412.30 0.0  28.09% 0.00% 1.081
Microsoft 23.20% 1.069 82,110.00 ######## 0.0  5.06% 0.00% 1.029
Samsung Electronics 28.60% 0.774 14,046.10 241,183.80 0.0 5.82% 0.00% 0.743
Western Digital 58.00% 1.378 9,953.00 11,544.40 0.0  86.21% 0.00% 1.012
Average 1.229 0.859

AAPL D/E 5.73%

AAPL P/E 0.00%
Tax Rate (5 Year Average) 22.15%
AAPL Levered Beta 0.898

(Exhibit 4) Source: Desktop Research, CapitalIQ

As a summary, according to the calculation and information, the WACC is 10.18%.

What are the key operating and growth assumptions for Apple’s discounted cash flow
(DCF) model?
• Terminal Growth Rate (g): As a conservative assumption, I used an approximate GDP
growth rate of 2% as the terminal growth rate (g).
• Revenue growth rate: Based on observation, Apple’s business model and market that the
company operates in are maturing gradually leading to a slow down in revenue growth. I
took an average growth in the last 4 years, which is about 3%
• Other assumptions: Cost of revenue growth rate, EBITDA, EBIT, other items related to
working capital such as Account Receivable, Inventory, Account Payables and Capital
Expenditure are calculated as a percentage of revenue. All the items are calculated based on
the observation of the company’s growth trends of those items and their intrinsic business
model. For example, for AR, we can observe that AR Days is increasing in the last two years,
so it is safe to take the average of the last two years for future AR growth assumptions.
Meanwhile, some items such as Accrued Liabilities did not happen in the last three years, so
it is safe to assume that there will be no Accrued Liabilities in future, because of the limited
information at hand and for the sake of the calculation and simplicity. The same assumption
is applied to add to intangibles items.

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 Course Name: Investment Banking and Financial Markets

Working Capital Schedule 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Accounts Receivable 27,219.00 30,343.00 29,299.00 35,673.00 48,995.00 45,804.00 48,352.34 49,850.20 51,394.45 52,986.55 54,627.97
Receivable Days 47.39 49.59 56.80 67.33 64.26 65.80 65.80 65.80 65.80 65.80
Inventory 2,111.00 2,349.00 2,132.00 4,855.00 3,956.00 4,106.00 4,090.82 4,228.67 4,363.29 4,500.83 4,633.45
Inventory Days 6.12 5.92 12.56 8.82 9.26 9.04 9.04 9.04 9.04 9.04
Other Current Assets 14,043.00 14,691.00 8,283.00 13,936.00 12,087.00 12,329.00 13,677.80 14,101.51 14,538.34 14,988.71 15,453.03
% of Revenue 6.3% 3.8% 6.1% 4.6% 4.7% 5.1% 5.1% 5.1% 5.1% 5.1%
Total Non-Cash Current Assets 43,373.00 47,383.00 39,714.00 54,464.00 65,038.00 62,239.00 66,195.80 68,255.20 70,370.92 72,550.93 74,789.28

Accounts Payable 30,196.00 35,490.00 37,294.00 44,242.00 55,888.00 46,236.00 48,819.89 50,464.89 52,071.45 53,712.87 55,295.53
Payable Days 92.47 103.61 114.49 124.57 104.31 107.89 107.89 107.89 107.89 107.89
Accrued Liabilities 18,372.00 23,169.00 21,864.00 - - - - - - - -
% of Revenue 9.9% 10.1% 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%
Other Current Liabilities 8,572.00 10,939.00 8,243.00 38,099.00 39,293.00 43,242.00 43,350.92 44,693.85 46,078.37 47,505.79 48,977.42
% of Revenue 4.7% 3.8% 16.6% 14.8% 16.6% 16.2% 16.2% 16.2% 16.2% 16.2%
Total Non-Debt Current Liabilties 57,140.00 69,598.00 67,401.00 82,341.00 95,181.00 89,478.00 92,278.71 95,266.63 98,257.71 101,326.54 104,380.84

Net Working Capital / (Defecit) (13,767.00) (22,215.00) (27,687.00) (27,877.00) (30,143.00) (27,239.00) (26,082.91) (27,011.43) (27,886.79) (28,775.62) (29,591.56)

(Increase) / Decrease in Working Capital 8,448.00 5,472.00 190.00 2,266.00 (2,904.00) (1,156.09) 928.51 875.37 888.83 815.94

Capital Expenditure 11,247.00 12,734.00 12,451.00 13,313.00 10,495.00 13,516.53 13,935.24 14,366.93 14,811.99 15,270.83
% of Revenue 4.8% 5.9% 5.4% 5.0% 4.0% 5.0% 5.0% 5.0% 5.0% 5.0%

(Exhibit 5)

What is your estimate of the intrinsic value of Apple’s stock? How does this compare to
the actual price?
• Based on my calculation, hereby as in Exhibit 6, my estimate of the company’s intrinsic value
of its stock is 192.98 USD.
Project Cash Flow (USD in millions, except per share data) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Total Revenue 182,795.00 233,715.00 215,639.00 229,234.00 265,595.00 260,174.00 268,233.67 276,543.00 285,109.75 293,941.87 303,047.60
Growth Rate (%) 27.9% -7.7% 6.3% 15.9% -2.0% 3% 3% 3% 3% 3%
Cost of Revenue 112,258.00 140,089.00 131,376.00 141,048.00 163,756.00 161,782.00 165,159.98 170,725.09 176,160.15 181,713.14 187,067.36
Margin (%) 61.4% 59.9% 60.9% 61.5% 61.7% 62.2% 62% 62% 62% 62% 62%
EBITDA 60,449.00 82,487.00 70,529.00 71,501.00 81,801.00 76,477.00 83,214.10 85,791.91 88,449.57 91,189.56 94,014.42
% of Revenue 35.3% 32.7% 31.2% 30.8% 29.4% 31.0% 31.0% 31.0% 31.0% 31.0%
Less: Depreciation and Amortization 11,257.00 10,505.00 10,157.00 10,903.00 12,547.00 12,586.86 12,976.78 13,378.77 13,793.22 14,220.50
% of Capital Expenditure 100.1% 82.5% 81.6% 81.9% 119.6% 93.1% 93.1% 93.1% 93.1% 93.1%
EBIT 71,230.00 60,024.00 61,344.00 70,898.00 63,930.00 70,627.24 72,815.13 75,070.80 77,396.34 79,793.92
% of Revenue 30.5% 27.8% 26.8% 26.7% 24.6% 26.3% 26.3% 26.3% 26.3% 26.3%
Less: Income Taxes 19,121.00 15,685.00 15,738.00 13,372.00 10,481.00 10.16 13.12 17.05 21.90 27.78
Unlevered Net Income 52,109.00 44,339.00 45,606.00 57,526.00 53,449.00 70,617.08 72,802.01 75,053.74 77,374.44 79,766.14
Plus: Depreciation and Amortization 11,257.00 10,505.00 10,157.00 10,903.00 12,547.00 12,586.86 12,976.78 13,378.77 13,793.22 14,220.50
Less: Capital Expenditure 11,247.00 12,734.00 12,451.00 13,313.00 10,495.00 13,516.53 13,935.24 14,366.93 14,811.99 15,270.83
Less: Additions to Intangibles 241.00 - - - - - - - - -
Less: Increase in Working Capital 8,448.00 5,472.00 190.00 2,266.00 (2,904.00) (1,156.09) 928.51 875.37 888.83 815.94
Unlevered Free Cash Flow 43,430.00 36,638.00 43,122.00 52,850.00 58,405.00 70,843.50 70,915.03 73,190.22 75,466.84 77,899.87

Discount Factor 0.91 0.82 0.75 0.68 0.62

PV of UFCF 64,300.60 58,420.91 54,726.55 51,217.25 47,985.70

Terminal Value 971,903.74

PV of 2020 Free Cash Flow Stub 64,300.60

PV of 2021-2024 Free Cash Flows 212,350.42
PV of Terminal Value 598,684.97
Enterprise Value 875,335.99
Less:
Total Debt 118,447.0
Preferred Stock 0
Minority Interest 0
Plus:
Cash and Equivalents 100,557.00
Equity Value 857,445.99

Shares Outstanding 4,443.24

Implied Per Share Value $ 192.98
Price to Date (Sep. 30, 2019) $ 55.99

(Exhibit 6)

How do your assumptions change if you consider instead the quarterly data for the
most recent three quarters? What impact would this make on your estimate for the
value of Apple’s stock? How does this compare to the current stock price?
• Quarterly data gives us more detailed trends of the company’s growth, such as seasonal
trends related to its operation. For example, we can observe that Apple’s quarterly revenue
is relatively higher in Q3 and Q4 than in Q1 and Q2. It can be safely assumed that the
business gains momentum when the holiday season approaches. Those seasonal trends
should be taken into consideration in the quarterly model. To my surprise, the DCF output

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 Course Name: Investment Banking and Financial Markets

gave me a significantly lower intrinsic value of Apple’s stock, which is 118.86 USD (the
Annual DCF model is 74.12 USD higher). I think that it is mainly because of the detailed
quarterly data and the latest quarterly data in 2020 give us more accurate and granular
vision.

PV of UFCF
Terminal Value 391,676.71

PV of 2020Q3 Free Cash Flow Stub 41,944.78

PV of 2020Q4-2025Q1 Free Cash Flows 262,047.14
PV of Terminal Value 243,826.89
Enterprise Value 547,818.80
Less:
Total Debt 112,723.0
Preferred Stock 0
Minority Interest 0
Plus:
Cash and Equivalents 93,025.00
Equity Value 528,120.80

Shares Outstanding 4,443.24

Implied Per Share Value $ 118.86
Price to Date (Dec. 30, 2019) $ 55.99
(Exhibit 7)

As a summary, while DCF delivers a more precise valuation, the output of the model highly
depends on the input and assumption of the model. Since no one can precisely predict the
future and it is intricate to think through all the operational and macro-and-microeconomic
aspects with the limited information, the model is highly susceptible to any changes related
to the input.

What do you feel are the major risks and opportunities it has faced in the recent past, is
facing now and will be facing in the future?

PCs, Tablets, Ultra Mobiles, Mobile Phones Global Shipments 2013-2020

3,000.

2,500.

2,000.

1,500.

1,000.

500.

0.
2013 2014 2015 2016 2017 2018 2019 2020

Traditional PCs (Desk-Based and Notebook) Premium Ultramobiles (Thin and light notebooks)

Basic and Utility Ultramobiles (Tablets and Chromebook) Mobile Phones

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 Course Name: Investment Banking and Financial Markets

(Exhibit 8) Source: Gartner

Smartphone Market Share Worldwide by Vendor 2009-2020

100%

90% 20% 23% 21%

31% 27.9%
80% 36% 38% 40% 38%
43%
70%
60%
50%
19% 15% 14%
15%
40% 15% 16% 14% 15%
30% 18%
20%
15%
10%
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Samsung Huawei Apple Xiaomi OPPO LG Lenovo ZTE vivo Sony RIM HTC Nokia Others

(Exhibit 9) Source: Gartner

After experiencing a rapid growth period with a rapid increase in penetration rate in 2013,
smartphones have now entered a mature stage in terms of sales as shown in the Exhibit,
showing two characteristics, 1) Industry sales growth slowed and the mobile devices market
has been shrinking. Mobile devices market segment has been seeing a tectonic shift, such as
mobile phone has been taking up overall mobile devices’ market share from other traditional
mobile devices such as PCs and notebooks due to the computing power of mobile devices
increased significantly. 2) The industry structure has been reshuffled, and the market has been
consolidated as the CR5 has been changed from 57.5% in 2014 to 72.1% in 2019. Apple is not
far away from those trends, although Apple’s market share has been relatively stable in the
biggest revenue contributor segment, iPhone sales.

Global Average Selling Price (ASP) of Smartphones 2010-2019 (in USD)

350.
348.6
336.8 332.5
300.
305.8
291.1
250. 276.2
261.3
245.1
200. 229.4
214.7

150.

100.

50.

0.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Exhibit 10) Source: Gartner

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 Course Name: Investment Banking and Financial Markets

If we take the mobile phone segment as an example, as the market matures and competition
intensifies, the ASP of mobile phones has been in constant decline. This trend affects every
player in the market, even Apple is a premium product maker. As the computing capacity of
devices and manufacturing capability and efficiency improving steadily, the switching cost has
been lowering. From the resource-based view perspective, the sustainable advantage that the
company created has been eroding. The imitation-resistant value chain created the value,
rarity, imitability and non-substitutability that will continuously affect the company’s position.

While the overall hardware market growth is decline, the hardware provides an important entry
point for internet services, which Apple has been transitioning into. Although Apple’s revenue
is still highly dependent on hardware sales, the high quality of products and services that
Apple provides will create massive opportunities in cloud computing, analytics, communication
services, consumer IoT, financial services, media and entertainment, and healthcare verticals.

All that being said, Apple has been facing the following risks and will continuously be exposed
to the following risks, which can be categorized into three risk categories, business risks,
financial risks and liquidity risks.

1. Global and regional economic and geopolitical risks: Revenue from the company’s
international operations comprise more than half. Any adverse macroeconomic
conditions such as inflation, recession, tariffs and changes to fiscal and monetary
policy, etc. will fundamentally affect its growth.
2. Technological shift: The company operates in an ever-changing technology market,
which is highly competitive. The product innovation, new standards development, rapid
adoption of technological advancements, and shortening of product lifecycles
materially affect the company’s growth.
3. Operational risks related to supply chain, product management and distribution
channels for its products and services: single or limited supply chain resources,
contract manufacturing model also exposes the company supply chain, product quality
and pricing risks. The company is also subjected to risks such as write-down of
inventories and cancellation of orders. Apple also relies on third parties to go-to-market
to capture value from its end users. It requires significant financial commitment both
from Apple and its partnerships. Weakening financial conditions of those distribution
channel partners causes partners to reduce their revenue contribution to Apple. Since
the company has been highly relying on e-Commerce and providing online services
such as streaming, cloud storage, any kind of system failures or network disruptions
will cause revenue impact.
4. Financial risks such as credit, foreign exchange, tax risks
5. Liquidity risks related to the companies’ investments

How relevant do you feel these factors are to the value of Apple and why?
It’s really hard to judge which risks are highly relevant and which are not, and their
corresponding degree of relevancy since nothing is predictable. Sometimes the risks can be
highly related to one another or one type of risk can cause another. Any type of business risks

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 Course Name: Investment Banking and Financial Markets

relating to the technology industry, competition, management, sufficient working capital may
materially affect the realization of forecasted earnings. Financial risks can shrink forecasted
earnings as well, since the company’s debt has been increasing. Since no clairvoyant analysts
or business managers exist, the degree of relevance cannot be accurately assessed. Same rule
applies to the opportunities that Apple wants to take advantage of.

Is Apple overvalued in August 2020? (after the release of the Q3 results) (please be
sure to support your answer)
Based on the DCF calculation, the stock price of Apple is overvalued since the implied share
price from quarterly DCF model is 117.87 USD.

PV of UFCF
Terminal Value 386,750.79

PV of 2020Q3 Free Cash Flow Stub 41,937.13

PV of 2020Q4-2025Q1 Free Cash Flows 261,554.72
PV of Terminal Value 239,927.34
Enterprise Value 543,419.19
Less:
Total Debt 112,723.0
Preferred Stock 0
Minority Interest 0
Plus:
Cash and Equivalents 93,025.00
Equity Value 523,721.19

Shares Outstanding 4,443.24

Implied Per Share Value $ 117.87
Price to Date (Aug. 30, 2020) $ 129.04
(Exhibit 11)

However, the numbers do not mean anything. All the inputs defined by the market and
business conditions will output different share price. We have to evaluate the health and
potential of business from various perspectives and frameworks such as PESTLE, Porter’s five
forces and VRIO. After wholistic revision of the business’s intrinsic value and the risks and
opportunities lie in the industry the company operates in, we can make a judgement whether
should we make adjustment to the model.

Would you invest in Apple today? (please be sure to support your answer)
I would invest in Apple. My reasons as follows,

1. Since the company is transitioning towards services-oriented business model, the

company’s gross margin may improve slightly. Buyback strategy will further improve
stock price.

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 Course Name: Investment Banking and Financial Markets

2. Growth in wearable segment: wearables technology has been advancing and currently
Apple’s penetration is low. Given Apple’s market eminence, install base of Apple Watch
and Airpods will grow in longer term.
3. Growth in services revenue due diverse internet services: The company launched
numerous services such as Credit Card with Master Card and Goldman Sachs, Apple
TV+, Arcade, which will help continually build subscription services base. All those
services will also drive Apple’s advertising revenue.

(Exhibit 12) Source: Internet

4. Growth in Healthcare: the company has been building strong relationship with
partners, such as GE, IBM Watson Health, McKesson and son on, in the healthcare
verticals. The company’s wide range of offerings from Apps (Health App, Health kit,
Research Kit, CareKit) to various wearable hardware and privacy will enable it to tap
into $3.5 trillion healthcare market.
5. Apple-as-a-Service: the ecosystem that Apple created will further lock users in and
create “annuity” like revenue model, which is recurring and stable.
6. Continuous R&D: Apple’s R&D labs have been allegedly developing AR and Automotive
products and services. Those developments will expand the company’s revenue
streams into new horizons.

Adjusting DCF model according to the business opportunities, the implied share price will be
162.03 USD.

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 Course Name: Investment Banking and Financial Markets

PV of UFCF
Terminal Value 606,440.24

PV of 2020Q3 Free Cash Flow Stub 42,179.69

PV of 2020Q4-2025Q1 Free Cash Flows 277,693.55
PV of Terminal Value 419,784.08
Enterprise Value 739,657.32
Less:
Total Debt 112,723.0
Preferred Stock 0
Minority Interest 0
Plus:
Cash and Equivalents 93,025.00
Equity Value 719,959.32

Shares Outstanding 4,443.24

Implied Per Share Value $ 162.03
Price to Date (Aug. 30, 2020) $ 129.04

If you were an investment advisor, what type of investor would you recommend invest
in Apple?
I would recommend it to long term value investors either institutional or retail given the
intrinsic earnings potential given the business opportunities and great financial health, while I
would not suggest it to short term and opportunistic investors.

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