APPLE, INC.

Date of Publication: 12-3-2022

Date of Most Recent 10-K/10-Q: 10-27-2022

Note on Income Statement: To create Pro Forma financial statements for Apple, I made a few assumptions. As mentioned during the company's 10/27/22 conference call, I assumed that the cost structure of the company would not change significantly despite the current events happening around the world, particularly in China. I focused on the operational value on the income statement and took into account the company's holdings in marketable debt and equity securities. I used a 3-year average cost structure as a percentage of sales and applied growth rates to solve for the company's implied share price.

Notes on Assumptions & Financial Statement Data: The projected growth rates for the company appear to be relatively moderate and may not accurately reflect the company's potential for future growth, particularly given its track record as a developed tech company. By using a standard method of projection, I was able to estimate the future values of key items such as Depreciation, Capital Expenditures (Capex), and Net Working Capital related to operations. The market "expects" the company to grow at a rate of approximately 11% in 2023, followed by a decrease of 3% in subsequent years. However, considering the company's history of strong growth, these projections may not accurately reflect its future performance.

Weighted Average Cost of Capital & Valuation

Notes on WACC: Apple has a strong equity base, with a market capitalization of over $2 trillion and a debt-to-equity ratio of essentially 0. This means that the cost of capital for the company is essentially the cost of equity. In calculating the cost of equity, I used a moderate market return of 8%, the current 5-year US Treasury Rate, and the observed levered Beta of Apple's share price compared to the overall market.

My Key Takeaway: The exit multiple method is a way to value a company using a range of multiples and growth rates. This method is commonly used for tech companies because the terminal growth rate is often not very accurate for such a short projection period. By using this method, we can see that the company is expected to experience double digit growth for only a few more years before declining and reaching a terminal rate within 5-7 years. However, I do not believe that this is an accurate representation of the company and expect it to experience double digit growth for 4-8 more years due to continued R&D, first-mover advantage, customer loyalty, and strong core competencies.

In the current economic climate, this company is likely fairly valued. Given the market trends and inflationary pressures, it is reasonable to assume that the company's current valuation reflects its potential performance in the near future. As such, it may be a good time to hold onto this stock for the next 3-6 months, while keeping an eye on the company's upcoming 10-Q report for further insight into its financial performance.

DECISION: Underweight, but wait 3-6 months for better macroeconomic and top line data for a more informed strategic decision.

Appendices: I've included a download link to the Excel file I used to drive my assumptions, and feel free to take a look. I also completed an analysis using the terminal value method, but I felt this was inaccurate for a multitude of reasons (mentioned above).