Apple Valuation

Contents

Part One: Macro-Analysis of Apple

I) Business Model

II) Current Market Position / Market Share

III) Corporate Strategies

IV) Historical Performance

V) Drivers for Value Creation & Major Risks

VI) Comparable Companies Analysis

Part Two: Enterprise Valuation

I. Firm Free Cash Flow

II. Discount Rate

III. Terminal Value and the Present Value of the Terminal Value

Part Three: Comments & Analysis

I. DCF & Comparable Companies Analysis

II. Settling on a Final Value

Works Cited

Appendix

Part One: Macro-Analysis of Apple

I) Business Model

Apple invests heavily in research and development to produce unique products. Its business model follows three broad industry categories: software engineering, hardware manufacturing, and retailing. Hardware manufacturing consists of computer manufacturing and the telephone handset industry. Retailing consists of music, book, video, and games retails. Apple's unique business model has allowed the industries, which seems unrelated, to be integrated. iTunes is an example of how the three broad industries are strongly linked together. In addition, they also provide a high standard of service. They choose to distribute their products by selling it in their own retail stores, licensed apple stores, selected distributors or telecommunication companies with whom Apple has contracts with, such as Verizon at a premium price. This generates profits to be plowed back into R&D and training its employees to provide quality service.

II) Current market position/ Market share

Apple's largest product line is its iPhone. In this telephone handset industry, Apple led the market with sales of $108,249.00M in 2011, followed by Nokia with sales of $51,922.90M. Other competitors, such as RIMM and Sony, are far behind Apple. In February 2012, it was reported that the iPhone sales have exceeded that of other phones such as the Androids. In the first quarter of 2012, iPhones sales have hit $37 million.

As a technology company, Apple's main competitors are HP (Hewlett-Packard), Google and RIMM. Its annual total sales of $108B are just slightly behind HP with total sales of 127B. Google falls behind Apple with 37.9B and then followed by RIMM with 19.9B. However, in terms of net profit margin, Apple is the highest among its competitors with a net profit margin of 25.80%, and followed very closely by Google at 25.69%, while HP suffers at 4.75%. Furthermore, Apple's revenue grows at 65% annually and its earning per share grows at 82.7%.

Total Sales Net Profit Margin

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III) Corporate Strategies

One of the reasons behind Apple's success is that as a company, Apple has pursued the differentiation strategy. Its products are unique, simple to use, of high quality, equipped with new groundbreaking technology and have a sleek design. With this strategy, Apple is able to charge premium prices as well. They are able to retain their current market and attract new customers and as a result, they are able to enhance the brand loyalty of their customers. Another reason is the great basic services that Apple provides. Rather than calling it the mundane customer service that many other technology firms call it, many Apple stores have an in-store genius bar where their customers can make an appointment to ask about the problems they are facing with the Apple products.

IV) Historical performance

Historically, Apple has not always performed well. There were periods during the late 1980s to early 2000s when the company wasn't quite profitable. However, since 2004, Apple has been performing constantly well and achieved a high rate of return. Its share price shot up during the past few years. However, there were some concerns about how the company was going to fare after the death of Steve Jobs. Its share price went down for some periods after Steve Jobs left Apple due to health reasons, but it fought back with the introduction of the iPhone 4s. In the long run, many analysts believe that Apple will continue to perform well, especially with the current high growth rate.

V) Drivers for Value Creation & Major Risks

Drivers for Value Creation:

Steve Jobs and innovation were the main drivers for value creation at Apple. It achieved tremendous growth in the past few years, mainly due to the continuous upgrade and innovation of the ipod, ipod touch, iphone, ipad and macbook laptops. The sole driver behind all the early technological advancements was Steve Jobs who focused on differentiating Apple from its competitors, especially by emphasizing on its unique appearance, design and innovative in-store hands-on experience of trying out the products. Furthermore, he and his team created an Apple culture that was widely accepted and anticipated by the consumers. A newer generation of Apple always came with a new function that could be used across all Apple products. In addition, all popular lines of products that are pervasive in our lives all have a similar design. They're sleek and have an elegant look to it with its metallic silver finish, which allows consumers to cultivate a cooler image for themselves.

Major Risks:

1) Management

With the death of Steve Jobs, many investors became uncertain about Apple's prospects, as he had been the driving force behind Apple. Many have predicted that Apple wouldn't be as profitable in the long term, without Jobs at the helm.

2) Lack of Talent and Innovation

In this ever-changing technology market, timely innovations