Let's Calculate AAPL Intrinsic Value - No BS Investing
Posted 166 views September 23, 2022, 10:00 - Elisabeth in Investing

Let’s Calculate AAPL Intrinsic Value

A stock’s intrinsic worth is distinct from its present market price. Investors need reliable stock valuation methodologies to determine if they are paying a fair price for a company’s shares. 

In this article, we will use the case study of Apple stock (AAPL), calculating AAPL intrinsic value to demonstrate the Discounted Cash Flow Model (DCF) and how it can be applied to determine the value of any publicly traded company. 

But first, let’s review two concepts: calculating intrinsic value and what the DCF model actually is.

Key Takeaways:

  • The intrinsic value of a company may be determined by subtracting its debts from its total assets. 
  • To get all the necessary intrinsic value data, you can use the discounted cash flow (DCF) analysis, which considers the money, or cash flows, that the business or investment is projected to earn in the future. 
  • Using the DCF model, the AAPL intrinsic value is $102 (as of September 2022).

Calculating intrinsic value

Below is the simple way to calculate intrinsic value of a company. The term “company valuation” refers to determining a corporation’s overall financial worth and all of its assets or resources. This procedure examines every facet to get an accurate assessment of a company’s present value. 

A business may have some liquid assets on hand, such as cash or short-term investments that can be converted to cash immediately. Additionally, it can be obligated to pay back some debt, which is a liability.

If a corporation can generate cash flows over a specific period of time (aka n years), its current intrinsic value will be expressed as follows:

Or it can also be written as:

DF here represents the discount factor that will be written as DF = 1/(1+r)

In layman’s terms? The value of a company may be determined by subtracting its debts from its total assets. 

However, this straightforward approach may not provide an accurate picture of a company’s worth. Many additional methods exist, such as book value, enterprise value, market capitalization, or EBITDA. 

We have adapted the DCF model to show just one way to calculate Apple’s intrinsic value.

Discounted Cash Flow Model (DCF)

The DCF technique is a popular approach to determining a company’s worth. The value of a firm or investment may be calculated using discounted cash flow analysis, which considers the money, or cash flows, that the business or investment is projected to earn in the future (normally over a 10-year period). 

The DCF model estimates the present value of future cash flows based on the discount rate and analysis period.

AAPL intrinsic value calculation using DCF

In this scenario, we’ll use the DCF model to determine AAPL intrinsic value. In addition, we’ll walk you through how to get the necessary business information for the calculation. 

1. Find Apple’s free cash flow

Financial information for AAPL can be found on Yahoo Finance. Search for AAPL, click on the Financials page, and select the Cash Flow tab. The AAPL Cash Flow Statement is shown here. 

You can follow the same procedure to get any company’s financial information. 

aapl intrinsic value

Free cash flow describes the sum of money generated each year that is not needed to pay any ongoing expenses or debts. It is the remaining amount after a corporation pays for its operating expenses and capital expenditures. 

As of September 2022, AAPL’s free cash flow for the last twelve months is $107,582,000,000.

2. Review future cash flow (FCF) projections and discounting to present value (PV)

Apple’s cash flow has been increasing, and although a few dips here and there are expected, an upward trend matters most. 

While Apple’s expansion rate isn’t what it was initially, it’s still rather substantial. Let’s look at forecasting its future cash flows by looking at its expected growth rate over the next five years on Finviz. You may get the information on Finviz by searching for “AAPL.”

AAPL EPS

From the data above, a growth rate of 9.48% in earnings per share over the next five years is expected for Apple. 

Let’s apply this growth rate over the next five years.

Since the current FCF of Apple stock is $107,582,000,000, future cash flow can be calculated as follows (we recommend using a scientific calculator):

  • Discounted CF₁ = 107,582,000,000 (1+0.0948) DF
  • Discounted CF₂ = 107,582,000,000 (1+0.0948)² DF2
  • Discounted CF3 = 107,582,000,000 (1+0.0948)3 DF3
  • Discounted CF4 = 107,582,000,000 (1+0.0948)4 DF4
  • Discounted CF₅ = 107,582,000,000 (1+0.0948)⁵ DF5

After five years, let’s consider a more conservative estimate for the Apple company’s worth (no one can reasonably expect the firm to keep expanding at this rate). So, we’ll suppose the growth rate is reduced by half to 4.74% from Year 6 through Year 10.

Let’s assume a scenario for the period from Year 6 to Year 10 by putting the figures below:

  • Discounted CF₆ =CF₅(1+0.0474) DF ⁶
  • Discounted CF₇ =CF₅(1+0.0474)² DF ⁷
  • Discounted CF8 =CF₅(1+0.0474)3 DF 8
  • Discounted CF9 =CF₅(1+0.0474)4 DF 9
  • Discounted CF₁₀ =CF₅(1+0.0474)⁵ DF ¹⁰

3. Research more Apple company data and other relevant information 

Let’s review the previous formula to calculate the company’s worth.

We need cash and short-term investments, total debt, and a discount factor to put figures into the formula mentioned above for the final computation. Find this data by returning to Yahoo Finance and searching for AAPL Financials. Click on the quarterly Balance Sheet.

AAPL Cash and Cash Equivalents

Both numbers are circled above but you can just use the total amount of cash and cash equivalents. For Apple, that number is $27,502,000,000.

Now, look at the bottom of the same table to see the total of all the money debts.

The amount of total debt is $278,202,000,000

The next figure we need is the number of shares outstanding. Verify this number by re-visiting the Finviz page for Apple and read the relevant data there.

AAPL Number of Shares Outstanding

So, the number of shares outstanding is 16,160,000,000.

4. Estimate the Beta and Discount Rate (r)

Keep in mind that a higher discount rate will result in a lower present value of the firm. 

An underestimation of the company’s value is preferable to an overestimation, which might result in purchasing an asset with a value far lower than expected. Similarly, overestimation might lead to an expensive purchase for nothing more than a pipe dream.

Calculate the discount rate by first finding Apple’s Beta.

If a stock’s Beta is high, its gains will increase relative to the market. AAPL’s Beta is currently 1.25, which is higher than 1, showing more volatility. 

AAPL Beta

Beta <1: If the beta value of a stock is less than one, investors might expect lower price swings than the market. Investment portfolios that include this stock are safer than comparable ones that do not.

Beta > 1: If the stock’s Beta is greater than one, it is expected to experience higher than average volatility. Including such stocks raises the portfolio’s risk and increases the possibility of a higher return.

Beta = 1: When Beta is equal to one, market and stock price volatility are equal.

Beta < 0: If the stock’s Beta is negative relative to zero, it has an inverse relation with the market.

As mentioned, AAPL’s Beta is 1.25

Because the Beta is greater than one, we factored in a conservative discount rate at 9% (slightly higher than the discount rate of 8.3-7.2%).

AAPL discount rate

Consequently, the discount factor is 1/(1+0.09) = 0.9174.

5. Combine all the figures into the DCF formula

With this whole set of data in hand, we can now determine Apple stock’s true worth.

  • Present Free Cash Flow = $107,582,000,000
  • Cash and Cash Equivalents = $27,502,000,000
  • Total Debt = $278,202,000,000
  • Growth Rate (1 to 5 Years) = 9.48%
  • Growth Rate Declined (6 to 10 Years) = 4.74%
  • Discount Rate = 9%
  • Discount Factor = 0.9174
  • Number of Shares Outstanding = 16,160,000,000

Now we will put all these figures into the formula one by one. 

  • Discounted CF₁ = 107,582,000,000 (1+0.0948) (0.9174)
  • Discounted CF₁ = 107,582,000,000 (1+0.0948)2 (0.9174)2
  • So on to Year 10.

All the figures are added to the formula above and then summed up with the amount of Cash and Cash Equivalents. That summed-up amount will be subtracted from the Total Debt amount

Then the remaining figure will be divided by the Number of Shares Outstanding, as shown in the formula above. After doing all of the above calculations on your scientific calculator, you arrive at an intrinsic value of $102 for each Apple share.

If the thought of executing all of these complicated calculations fills you with anxiety, then you can compute the intrinsic value of any company using this DCF Model spreadsheet

The bottom line: are AAPL shares overvalued or undervalued?

Currently, the share price of AAPL is $153.10, while its intrinsic value, which we have calculated, is $102. 

Therefore, AAPL stock is overvalued. Note that this valuation is just to show you how we can break a company’s data to compute its intrinsic value. It is simply an estimate derived from a single, conservative model. Valuation is just one piece of the puzzle when determining whether to invest in a company. 

The DCF model is not the only standard for valuing investments. Instead, it should be used as a general guide to help you determine what conditions must exist for this company to be undervalued or overpriced. The results can appear quite different if the firm expands at varying rates or if the cost of equity or risk-free rate suddenly changes.

Want to simplify company valuations so you can invest with confidence? We recommend Investing Pro Plus. This tool helps you easily evaluate a company’s intrinsic or fair value and its stock. Sign up for a free trial for Investing Pro Plus here.

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Elisabeth O. is an MBA graduate with a specialization in International Finance & Investments and over six years of financial writing experience. She is passionate about long-term investing to build wealth, avoids day trading and speculations, and loves a good Warren Buffet quote.