NOTE: PERSONAL OPINION ONLY

INTRODUCTION:

AAPL has been an impressive company these past few years, being the first company to hit a 2 Trillion Market Cap and then 3 Trillion within a short time frame. Despite being a luxury good its a hit with the emerging markets having double digit Y/Y growth even with a challenging backdrop. However, the company may have overheated as investors wrongly believed that the company can continue selling more and more phones.

REVENUE:

When building a revenue model, I broke it down into devices shipped and what %of the devices shipped actually translates into an active user and what %of active users will explore the AAPL ecosystem.
REVENUE MODEL: [INSERT]

Active IPhone Users

When forecasting Active IPhone Users, I looked at the conversion rate (What %of IPhones shipped translated into additional Active Users.) i.e. What %of our IPhone shipped is for personal use. I did not take 2021’s conversion rate into consideration as the Additional users came from Covid-19 the conversion rate is likely skewed higher as during Covid there was a large demand for phones so more people were likely to be buying for personal use so the conversion is higher than normal. This conversion rate is not 100% because people could be buying for corporate use or accounting practices used by AAPL, AAPL recognises revenue the moment the IPhone is shipped so just because the IPhone is shipped does not mean it is sold to an active user. As AAPL breaks into the emerging markets the conversion rate will have a slight decline as AAPL ships more into a lower conversion rate market as it will take time for users to shift their taste and preference. But, this trend will reverse back to historic rates overtime.
Data taken from (SOURCE)

IPhone

I don’t believe that AAPL’s competitive advantage comes from how it offers the most “advanced technology”. IPhone’s very recent features like crash detection are touted as the result of AAPL’s 20+ billion R&D spend. However, crash detection was already present in Samsung's phones since 2020. Battery life is also another consideration, AAPL’s IPhone 15 has a battery life of almost 11 hours (SOURCE) compared to Samsung’s Galaxy S23 11 hours+ (SOURCE) it seems that the difference is miniscule in terms of quality of flagship products. So it seems that most of the IPhone's competitive advantage comes from branding. The end goal for AAPL is to build such a strong ecosystem of products for all aspects of life and the IPhone is the first gateway to accessing this ecosystem, increasing the appeal of an IPhone. “We continue to try to convince more and more people to switch because of our — the experience and the ecosystem and — that we can offer them.” – 2023 Q3 Earnings conference.

When forecasting IPhone shipped, as AAPL shifts production into India it could lower the price to buy IPhones in India which could lead to higher sales number as IPhone only penetrated a small % of the smartphone market in India. As AAPL begins increasing presence in India, it could also set the stage for cheaper sales prices to developing markets which further increases IPhones shipped. So, I’ll assume accelerated growth after AAPL develops a stronghold for production in India.

When forecasting Revenue/IPhone, Having a finance program to reduce the threshold for affordability. “The majority of IPhones, at this point, are sold using some kind of a program, trade-ins, installments, some kind of financing. And that percentage…it’s well over 50%” – 2023 Q3 Earnings conference. December 2019, AAPL unveiled their 24-months interest free installment payment to buy an IPhone. This has since improved revenue as more people begin to see IPhone as being more “affordable” in that they don't have to make a huge lump sum payment all at once. I believe that the initial double digit Y/Y increase in the past is due to this program. However, most of the low hanging fruit i.e. people on the fence about an IPhone due to the price tag are already picked. So, the Y/Y will decline at half the previous year’s rate until AAPL sets up a stronghold in India and AAPL becomes significantly more cheap to the rest of the developing market.

Overall for IPhones at base case, I expected a CAGR of 8% compared to 6.8% from (SOURCE).

IPad & Mac
When forecasting the number of IPad and Macs sold, I looked at the conversion rate for active IPhone users. As IPhones are usually the introduction into the AAPL ecosystem, I looked at what %of our active IPhone users end up breaking into the other parts of the ecosystem. I assume this conversion rate slightly increases over time as AAPL becomes more integrated into the developing market as they sell more of their IPhones to the developing market. I assume this conversion rate only slightly increases throughout my forecast to avoid making too bold of an assumption that consumers WILL change their taste and preference to a very large extent.
When forecasting Revenue/IPad shipped and Revenue/Mac shipped, I assume that as AAPL breaks into newer markets more people will be introduced to the IPad and Mac through cheaper entry price models. I assume that Y/Y Revenue/IPad Shipped follows the same trajectory as IPhones.
Overall for IPad at base case, I expected a CAGR of 6.4%.
For Mac at base case, I expected a CAGR of 7.1%.

Services
AAPL believes that price increase for their services is justified because the value of services is higher now, “We now have a lot more content…so, we've increased the price to represent the value of the service.” – 2022 Q4 Earnings Conference.
When forecasting Revenue/Active Iphone Users, opting for less granularity I took the average of the last 3 years before tapering downwards.

Wearables, Home and Accessories
When forecasting Wearables, Home and Accessories, opting for less granularity I forecasted it as a %of IPhone revenue.

COST:

COST MODEL: [INSERT]

Cost of Goods Sold
When forecasting Cost of Products, I took into account IPhone’s plans to shift production to India. “Apple could manufacture 25% of all iPhones in India by 2025” (SOURCE). To avoid being too optimistic, I assume that the cost savings from shifting production to India is only to a limited extent. The reason being is that there is a high potential for diseconomies of scale by not concentrating production in 1 area, however as a contradictory factor labor is cheaper in India so it’s uncertain which factor is stronger.

Cost of Services

When forecasting Cost of Services, I assume that the cost of services will have a slight bump as AAPL enters new markets and wants its products to be attractive so they spend more on services e.g. Apple music to make their IPhones more appealing. Plus, they want to become cash neutral as reiterated in their earnings conference, so I assume elevated spending before it tapers downwards as AAPL doesn't need to spend as much as they needed in the past to attract subscribers.

R&D and SG&A

When forecasting R&D and SG&A, I opted for less granularity and followed historic trends.

CAPEX AND D&A:

D&A
When forecasting D&A, I opted for less granularity and followed historic trends.

CapEX

When forecasting CapEX, looking at historic %Earnings reinvested and ROIC I took those into account and assumed that as AAPL breaks into emerging markets they increase %Earnings reinvested before tapering back into historic averages. Also, I took into account how AAPL wants to be cash neutral when forecasting CapEX.

SANITY CHECK: [INSERT]

WACC:

Cost of Debt

AAPL has a bond rating of AA+ (SOURCE)

Cost of debt (1M Avg) = 5.6%

Marginal Tax Rate = 21.0%

AT Cost of Debt = 4.4%

Cost of Equity

US has a bond rating of AA+

Risk Spread of AA+ (1M Avg) = 0.7%

10Y T-Bond Yield (1M Avg) = 4.65%

RFR = 4.0%

Beta (SOURCE) = 1.3

4050 = (4050 * 4.25%) * (1+16%) / (1+R) + [((4050 * 4.25%) * (1+16%)) * (1+3.82%) / (R – 3.82%)] / (1 + R) ^ 2

R = 10.3%, ERP = 6.3%

COE = 12.2%

Weightage

Share price (5D Avg) = 175.1

Shares O/S = 15908M

Market Value of Equity = 2785491M

DEBT BREAKDOWN: [INSERT]
DEBT SCHEDULE: [INSERT]

Average duration of debt is 12 Years.

Interest Expense = 2931M

Assume interest expense remains constant throughout the duration of the existing debts.

Market Value of Debt = 110910M

%Debt = 28.5%

%Equity = 71.5%

WACC = 9.98%

CONCLUSION:

Ultimately, at base case I value AAPL at $130.68 per share. I believe that since it is a “premium” item and how its value proposition is just the strong marketing that the company does for its products its hard to differentiate AAPL's products from their competitors. The uncertainty of the macro environment and whether countries will actually prosper enough to see IPhone as an affordable luxury leads me to think that AAPL is overvalued.

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