This time it didn't. Apple still seems about reasonably valued. I would nevertheless hold off buying their shares until Apple or the market stumbles - and you can buy Apple shares more cheaply.
The exercise below is still worth going through to build your own model of Apple or other companies. The difficult balancing act is to choose how much information to include, to make the model informative and useful without making it inaccessible.
Refining the Apple model
Enhance the Apple model with forecasts for the individual product categories, to make total sales forecasts more robust and more closely linked to reality.
Get Apple's latest publicly filed 10K report. Flip to page 29 and check the product break-down. Start building a model for total sales based on the various product areas. Calculate your own Average Selling Prices (ASP).
| 2010 | 2011 | 2012 | 2013 | 2014 | |
| iPhone, # | 125046 | 150257 | 169219 | ||
| iPhone ASP | 629 | 607 | 603 | ||
| iPhone sales | 78692 | 91279 | 101991 | ||
| iPad, # | 58310 | 71033 | 67977 | ||
| iPad ASP | 531 | 450 | 445 | ||
| iPad sales | 30945 | 31980 | 30283 | ||
| MAC, # | 18158 | 16341 | 18906 | ||
| MAC ASP | 1279 | 1315 | 1274 | ||
| MAC sales | 23221 | 21483 | 24079 | ||
| iPod, # | 35165 | 26379 | 14377 | ||
| iPod ASP | 160 | 167 | 159 | ||
| iPod sales | 5615 | 4411 | 2286 | ||
| iTunes, s/w and svcs: sales | 12890 | 16051 | 18063 | ||
| Accessories (incl 3rd party) | 5145 | 5706 | 6093 | ||
| Total sales | $156,508 | $170,910 | $182,795 |
Read the footnotes on the following pages in the 10K, to see what Apple is saying drove the changes in unit sales and dollar sales. Then make some initial forecasts based on your best guesses on what might drive sales going forward, or by just intelligently extrapolating previous trends.
I imagine increased competition on phones will make unit sales growth gradually drop toward the industry average (which itself is likely to drop toward global GDP). I think the iPod form factor will disappear and I think Apple will struggle with both unit growth and ASPs for iPads and MACs due to Apple being less unique, less cool and being much larger. Apple is becoming a BMW instead of a Ferrari or Porsche.
I'm modelling growth gradually dropping for iTunes too, and GDP-like growth for accessories. Apple enjoyed a first mover advantage and does have a faithful installed base, but competition is heating up and it's becoming easier every day to buy digital content from any source.
Use what you know about the last ten years' change to consider risks in the future
Once again, Apple was unique for a while, for longer than most consumer companies but it won't last forever. Just think about how unbeatable the combination of Nokia, Sony, Motorola, Blackberry seemed in 2007 before the iPhone. Going forward, Xiaomi, HTC, LG, Lenovo, Google, Microsoft, Motorola and yet unknown companies are ready to give Apple a run for its money in phones and computers.
I know I should include forecasts for Apple Watch, as well as unknown future products. On the other hand I think new products will basically replace, cannibalize and more or less just lead to a continuation of previous trends anyway. The Watch, e.g., is likely to be an inconsequential niche product in my view, similar to the iPod.
Refine the product category model, with unit growth, sales growth and forecasts like this:
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||
| iPhone, # | 125,046 | 150,257 | 169,219 | 186,141 | 201,032 | 215,104 | 228,011 | 239,411 | |||
| unit growth | 20.2% | 12.6% | 10% | 8% | 7% | 6% | 5% | larger grows slower | |||
| iPhone ASP | 629 | 607 | 603 | 603 | 603 | 603 | 603 | 603 | inflation vs novelty/uniqueness | ||
| iPhone sales | $78,692 | $91,279 | $101,991 | $112,190 | $121,165 | $129,647 | $137,426 | $144,297 | |||
| iPad, # | 58310 | 71033 | 67977 | 64,578 | 61,349 | 58,282 | 55,368 | 52,599 | |||
| unit growth | 21.8% | -4.3% | -5% | -5% | -5% | -5% | -5% | less favored form factor | |||
| iPad ASP | 531 | 450 | 445 | 441 | 437 | 432 | 428 | 424 | |||
| iPad sales | 30945 | 31980 | 30283 | $28,481 | $26,787 | $25,193 | $23,694 | $22,284 | |||
| MAC, # | 18158 | 16341 | 18906 | 19,095 | 19,286 | 19,479 | 19,674 | 19,870 | |||
| unit growth | -10.0% | 15.7% | 1% | 1% | 1% | 1% | 1% | ||||
| MAC ASP | 1279 | 1315 | 1274 | 1274 | 1274 | 1274 | 1274 | 1274 | no particular guess | ||
| MAC sales | 23221 | 21483 | 24079 | $24,320 | $24,563 | $24,809 | $25,057 | $25,307 | |||
| iPod, # | 35165 | 26379 | 14377 | 8,626 | 5,176 | 3,105 | 1,863 | 0 | |||
| unit growth | -25.0% | -45.5% | -40% | -40% | -40% | -40% | -100% | form factor disappearing | |||
| iPod ASP | 160 | 167 | 159 | 151 | 144 | 136 | 130 | 0 | sales necessary | ||
| iPod sales | 5615 | 4411 | 2286 | $1,303 | $743 | $423 | $241 | $0 | irrelevant anyway | ||
| iTunes, s/w and svcs: sales | 12890 | 16051 | 18063 | 19,869 | 21,459 | 22,961 | 24,339 | 25,556 | |||
| unit growth | 24.5% | 12.5% | 10% | 8% | 7% | 6% | 5% | competition, Apple less unique | |||
| Accessories (incl 3rd party) | 5145 | 5706 | 6093 | 6,398 | 6,718 | 7,053 | 7,406 | 7,776 | |||
| unit growth | 10.9% | 6.8% | 5% | 5% | 5% | 5% | 5% | ||||
| Total sales | $156,508 | $170,910 | $182,795 | $192,561 | $201,434 | $210,086 | $218,162 | $225,220 | |||
| sales growth | 9.2% | 7.0% | 5.3% | 4.6% | 4.3% | 3.8% | 3.2% | ||||
| Current forecast in model | 155,970 | 170,910 | 182,795 | 193,763 | 203,451 | 213,623 | 224,305 | 235,520 | |||
| 9.6% | 7.0% | 6.0% | 5.0% | 5.0% | 5.0% | 5.0% |
Finally, compare the bottom-up forecasts for sales and sales growth with top-down guesstimates from earlier. The new forecast is less optimistic than before, and I trust that more than my first guess.
I have no new information on gross margins per product. You could guess what the margins are, but I don't think that would add anything useful to the model at this point. However, on page 82 in the latest 10K, the quarterly total gross margins for 2013 and 2014 are listed. If the level and trend look stable we can use that for the entire company. Just throw the quarterly numbers into a spreadsheet like below.
Notice that there were a lot of launches in Q4 2014 and Q1 2015 (including the Apple Watch). That probably means I should upgrade my sales forecasts for 2015 compared to what I have in my model now. I bump up sales growth for iPhones to 13% (previously 10%) in 2015. In addition I change iPod unit growth from -40% in 2015 to 0% to account for Apple Watch.
Know what you don't know
Margins, however, might actually fall, due to the cost of several launches and fine tuning production. I keep them stable nevertheless since I really don't have any idea.
Quarterly data from page 82 in the 10K report:
| Q1 2013 | Q2 2013 | Q3 2013 | Q4 2013 | Q1 2014 | Q2 2104 | Q3 2014 | Q4 2014 | |||
| share of year sls | 31.9% | 25.5% | 20.7% | 21.9% | 31.5% | 25.0% | 20.5% | 23.0% | ||
| quarter "strength" | -0.4% | -0.5% | -0.2% | 1.1% | relative strength of quarter | |||||
| Net sales | $54,512 | $43,603 | $35,323 | $37,472 | $57,594 | $45,646 | $37,432 | $42,123 | ||
| growth | 5.7% | 4.7% | 6.0% | 12.4% | y/y growth rate | |||||
| Gross margin | $21,060 | $16,349 | $13,024 | $13,871 | $21,846 | $17,947 | $14,735 | $16,009 | ||
| margin % | 38.6% | 37.5% | 36.9% | 37.0% | 37.9% | 39.3% | 39.4% | 38.0% | ||
| y/y margin change pp | -0.7% | 1.8% | 2.5% | 1.0% | y/y chg in margin | |||||
| Net margin | $13,078 | $9,547 | $6,900 | $7,512 | $13,072 | $10,223 | $7,748 | $8,467 | ||
| margin % | 24.0% | 21.9% | 19.5% | 20.0% | 22.7% | 22.4% | 20.7% | 20.1% | ||
| y/y margin change pp | -1.3% | 0.5% | 1.2% | 0.1% | y/y chg in margin |
I think margins look stable enough for now to simply extrapolate them at the current level. Competition puts pressure downward, but economies of scale act as a positive counterweight.
Link the new bottom-up model for sales into the main forecast sheet. At the same time you have to change the growth inputs on row 22 to a calculation of what's going on on row 5 (sales).
The model didn't change that much from earlier, but the confidence in it has increased somewhat. You now know what's happening to the various product categories, and you have a feel for ongoing launches, as well as quarterly growth and margin progression.
The value of Apple's stock still comes out around 107 USD per share.
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |
| Sales | 65,070 | 108,600 | 155,970 | 170,910 | 182,795 | 196,489 | 205,234 | 213,904 | 222,071 | 229,156 |
| Cost of sales | 106,606 | 112,258 | 139,507 | 145,716 | 151,872 | 157,670 | 162,700 | |||
| Opex | 15,305 | 18,034 | ||||||||
| Operating profit | 18,540 | 34,210 | 55,760 | 50,155 | 53,483 | 56,982 | 59,518 | 62,032 | 64,401 | 66,455 |
| Income tax | (13,118) | (13,973) | (14,815) | (15,475) | (16,128) | (16,744) | (17,278) | |||
| Earnings | 14,010 | 25,920 | 41,730 | 37,037 | 39,510 | 42,167 | 44,043 | 45,904 | 47,656 | 49,177 |
| Diluted nr of shares | 6,521,634 | 6,122,663 | 5,877,756 | 5,642,646 | 5,416,940 | 5,200,263 | 4,992,252 | |||
| Earnings Per Share | 5.68 | 6.45 | 7.17 | 7.81 | 8.47 | 9.16 | 9.85 | |||
| Revenue per share | 26.2 | 29.9 | 33.4 | 36.4 | 39.5 | 42.7 | 45.9 | |||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||
| P/E | 19.2 | 16.9 | 15.2 | 14.0 | 12.9 | 11.9 | 11.1 | |||
| P/S | 4.2 | 3.7 | 3.3 | 3.0 | 2.8 | 2.6 | 2.4 | |||
| Market cap at current share price | 667,370,267 | 640,675,456 | 615,048,438 | 590,446,501 | 566,828,641 | 544,155,495 | ||||
| sales growth | 9.6% | 7.0% | 7.5% | 4.5% | 4.2% | 3.8% | 3.2% | |||
| Operatingmargin | 28.5% | 31.5% | 35.8% | 29.3% | 29.3% | 29.0% | 29.0% | 29.0% | 29.0% | 29.0% |
| tax rate | -26.2% | -26.1% | -26% | -26% | -26% | -26% | -26% | |||
| Share count evolution | -6.1% | -4% | -4% | -4% | -4% | -4% | ||||
| cost of share purchases at current price | 26,695 | 25,627 | 24,602 | 23,618 | 22,673 | |||||
| Buyback cost as proportion of earnings | 63% | 58% | 54% | 50% | 46% | |||||
| Dividends per share DPS | 1.64 | 1.82 | 2.00 | 2.19 | 2.39 | 2.60 | 2.81 | |||
| Cost of dividends and equiv. | 10564 | 11126 | 11756 | 12352 | 12952 | 13530 | 14052 | |||
| Shareholder's equity | 47,790 | 76,620 | 118,210 | 123,549 | 111,547 | 115,263 | 121,328 | 129,678 | 140,187 | 152,638 |
| Cash | 10,746 | 14,259 | 13,844 | 17,673 | 23,854 | 32,327 | 42,963 | 55,545 | ||
| Long term debt | 16,960 | 28,987 | ||||||||
| Equity per share | 18.9 | 18.2 | 19.6 | 21.5 | 23.9 | 27.0 | 30.6 | |||
| Return on Equity = Earnings/equity | 54.2% | 54.5% | 31.3% | 32.0% | 37.8% | 38.2% | 37.8% | 36.7% | 35.1% | |
| Net income | 14,010 | 25,920 | 41,730 | 37,037 | 39,510 | 42,167 | 44,043 | 45,904 | 47,656 | 49,177 |
| Depreciation and amortization etc | 1,030 | 1,810 | 6,557 | 13,520 | 15,900 | 17,091 | 17,852 | 18,606 | 19,316 | 19,933 |
| Deferred taxes | 1,440 | 2,870 | 4,410 | 1,140 | 2,350 | 2,442 | 2,551 | 2,658 | 2,760 | 2,848 |
| Other, net working capital | 903 | 1,170 | (1,740) | 2,250 | 2,860 | 1,089 | 1,137 | 1,185 | 1,230 | 1,270 |
| Total operating Cash Flow | 17,383 | 31,770 | 50,957 | 53,947 | 60,620 | 62,788 | 65,583 | 68,353 | 70,963 | 73,227 |
| According to Apple | 53,666 | 59,713 | 62,788 | 65,583 | 68,353 | 70,963 | 73,227 | |||
| Investments | (33,774) | (22,579) | (20,509) | (21,422) | (22,327) | (23,180) | (23,919) | |||
| Financing including stock repurchases | (16,379) | (37,549) | (38,450) | (37,979) | (37,553) | (37,148) | (36,726) | |||
| TOTAL CHANGE IN CASH | 3,513 | (415) | 3,829 | 6,182 | 8,473 | 10,636 | 12,582 | |||
| Free cash flow excluding dividends and Buybacks | 42,279 | 44,160 | 46,026 | 47,783 | 49,308 | |||||
| End of year equity | 115,263 | 121,328 | 129,678 | 140,187 | 152,638 | |||||
| Discount rate, required return | 7% | 7% | 7% | 7% | 7% | 7% | ||||
| Discount factor | 107% | 114% | 123% | 131% | 140% | |||||
| Present value of cash flow | 39,513 | 38,571 | 37,571 | 36,454 | 35,156 | |||||
| Sum of present value of cash flow (Net Present Value) | 39,513 | 78,085 | 115,656 | 152,109 | 187,265 | |||||
| End value of business after last cash flow | CF yield requirement | 6% | 6% | 6% | 6% | 6% | 6% | |||
| CF multiple | 16.67 | 16.67 | 16.67 | 16.67 | 16.67 | |||||
| End value | Next year's CF times warranted end multiple | 736,008 | 767,102 | 796,391 | 821,797 | 862,887 | ||||
| Discounted end value (End value divided by discount factor) | 687,858 | 670,017 | 650,092 | 626,945 | 615,226 | |||||
| Sum of NPV (disc CF stream + disc end value) | 727,371 | 748,101 | 765,748 | 779,054 | 802,492 | |||||
| Discounted cash flow value per share (end of 2014); sum of NPV divided by nr shares today (eof 2014) | 119 | 122 | 125 | 127 | 131 | |||||
| Other approaches | ||||||||||
| Required return on equity | 7% | 7% | 7% | 7% | 7% | |||||
| RoE next year | 38.2% | 37.8% | 36.7% | 35.1% | ||||||
| Warranted equity multiple | 546% | 540% | 525% | 501% | ||||||
| Equity | 115,263 | 121,328 | 129,678 | 140,187 | ||||||
| Warranted value | 629,188 | 655,769 | 680,806 | 702,525 | ||||||
| Discounted warranted value | 588,026 | 572,774 | 555,741 | 535,953 | ||||||
| per share (today's number of shares) | 96.0 | 93.5 | 90.8 | 87.5 | ||||||
| LT market PE | 105 | Practical | Hidden assumptions | |||||||
| DCF | 125 | Correct | Explicit but sensitive | |||||||
| RoE | 91 | Crude but correct | Very rough measures of Eq and rRoE | |||||||
| Average | 107 |
The next logical step would be to forecast sales for individual iPhone models, since iPhones make up more than half of Apple's sales. That information could be used for forecasting individual quarters tro possibly speculate on share price movements around company earnings presentations. I wouldn't recommend that. I actually think it's mostly a waste of time. Apple is already managing its product launches the best way it can, which produces a quite smooth yearly growth trend that gradually tapers off due to GDP growth, industry growth and competition.
I think, once again, this basic model proves that Apple is quite boring, very big, neither obviously expensive, nor cheap as long as nothing "unexpected" happens. Whether a surprise is likely to be positive or negative is anybody's guess. My personal estimate is that a recession, a product failure, competition, a stock market fall, a natural disaster, increasing risk aversion and required return or something similarly negative is more likely than Apple suddenly boosting its growth or margins. Sure, Apple could launch the iCar or iGroceries, iHotels or whatever, but I just don't see it and wouldn't advise betting on it.
Buy Apple shares later
If you feel you just have to buy Apple shares, do yourself a favor and wait for a stumble, a product miss or a stock market correction. Then buy. Don't buy Apple shares now, right when both Apple and the market are at their respective peaks of the game.