STOCK ANALYSIS

APPLE Inc.

Prepared By:
Vansh Khanuja
Vanshkhanuja78@gmail.com
June 24, 2021
PREFACE
This analysis report covers various aspects of stock selection.
Although my report is not something you should solely base
your investments on, but I'm sure it can surely serve as a guide.
Stock selection is a process of elimination, with an approach
like this, one should constantly find reasons not to buy the
stock. This will help you make better investment decisions as
stock selection can be quite tedious.
The reasons for eliminating a stock can be different and does
not necessary give a negative opinion about the company.
Everyone has different investment horizons and different risk
appetite; this makes it tough to make an analysis that will serve
everyone equally because of the bias towards different
companies we all have. Thus, it would be better for me to
explain my perspective so you can better understand the
reasons I select/reject a stock.
I’m looking for undervalued growth stocks. My time horizon
varies with kind of stocks but generally you expect it to be at
least 5 years. The company should have excellent management
and display consistent growth over a long term. While the latter
can be easily known just by analyzing the financials, The major
concern is regarding how to check if the management is
competent enough.
The only thing one could do is again try to gain some insights by
looking at the financials. A healthy growth rate added with
better than average margins will display managerial
competency. Along with this, careful scrutinization of
management’s discussion section in the annual reports over the
last few years can surely yield some insights.
Valuation is the last step in stock analysis. The basic role is to
use all the facts obtained to find a price that is justified. This is
probably the most controversial part because there is no
perfect way to value a company. I will be using a DCF
(Discounted Cash Flow) model and use the risk-free-rate as the
discount rate. I understand the conventional method of DCF
includes calculation of weighted average cost of capital that is
used to discount the cash flows but I'm not using it because I
will deduct 25% of the calculated value to get a margin of
safety. Furthermore, I will be conservative in my projections so
using risk-free-rate is appropriate.
Given the fact that the intrinsic value of any given company
cannot be calculated with exact precision, it is important to
consider that I can be wrong in my projections. This is the
reason I will be deducting 25% of the calculated value. If then
the stock is selling at around the price I calculated, then only I
will be bullish on that particular investment.
The strategy I just mentioned is a rough explanation of what I
will follow. There can be certain adjustments that will vary
according to the company. Note that the valuation is based on
forecasts of Future Cash Flows (FCFs) and thus carry an
inherent flaw I.e., predictions. Given that there are many
variables that can disrupt cash flows, you are advised to invest
only after you’ve understood all the points I've mentioned and
if you can hold the stock patiently for years until the
discrepancy between the price and value is fixed. This process
can be frustrating and you’ll be tempted to sell in bear markets,
but if you truly understand the principles of investing, I expect
you to buy more during such conditions. If there are any
questions concerning any phase of the report, I would welcome
hearing from you.
TABLE OF CONTENTS:

(1) General Information:

• Introduction
• Business
• Apple’s Future
• Other info
(2) Financial Statements and valuation
• The Balance Sheet
• P&L Statement
• Cash Flows
• Key Ratios
• Valuation
(3) Conclusion
• Who should buy this stock?
(4) Appendix
• Economic Moat
(5) References
 (1) General Information
Introduction
Apple, founded by Steve Jobs and Steve Wozniak in 1977 is the
most valuable US company today (by market capitalization).
With a current share price of 133.59$ (as at 24 June, 2021), Its
market cap stands at 2.2 trillion USD. It is currently trading at
29.9 times earnings. The Company’s common stock is traded on
The Nasdaq Stock Market LLC under the symbol AAPL. Apple’s
current CEO is Tim Cook.
At first, the market cap might convince you that the stock
cannot grow any further. A 15% stock growth would imply that
in 5 years, the market cap would be 4 trillion USD. At this rate,
Apple will be bigger than the US economy; this is obviously not
possible.
The reason I'm analyzing this stock is that at a given price, it
could be attractive. Surely you will not get a 10 bagger (10-1
returns) if you invest in companies this big, but there might still
be some room for growth. Even if the intrinsic value is
considerably more than the current price, I will not recommend
putting more than 5% of your investment (because you can find
a lot more growth stocks that can return huge in the long
term).
Business
Apple designs, manufactures and markets smartphones,
personal computers, tablets, wearables and accessories, and
sells a variety of related services. Its products include the
iPhone, Mac, iPad, Apple Watch, Apple TV, etc.
Company’s services include:
Apple care – A fee-based service providing priority access to
technical support, access to the global Apple authorized service
network for repair and replacement services, and in many cases
additional coverage for instances of accidental damage and/or
theft and loss, depending on the country and type of product.
Cloud Services – The company provides cloud services to both
apple and windows users to keep their content up-to-date.
Digital Content – The company’s most important digital service
is the AppStore that allow customers to discover and download
applications and digital content, such as books, music, video,
games and podcasts. Other than this, the company also
provides other digital services like Apple News, Apple Fitness,
Apple Music and Apple Arcade.
Payment – The company has launched Apple Card, a co-
branded credit card. The company also provides cashless
payment service through Apple Pay.
Apple’s Future
The tech industry is highly competitive, the rapid changes
makes it difficult to forecast earnings into the future. The stock
has been an excellent buy for whoever purchased it after the
dot-com bubble burst. The stock after the bubble was trading
as low as 0.23 cents (split adjusted), that’s 586x your money in
21 years if you sold at 135$. However, no one could have
predicted this successfully. The iPod was not yet launched, no
one had heard about the iPhone, because it didn’t exist. So, the
major products that contributed to Apple’s success were not
yet invented. This made Apple a speculative bet. Even today, I
cannot say for sure what will be Apple’s major product in the
next 10-20 years. History suggests that the iPhone will still be at
the top of its revenue contributor but that is highly unlikely.
The reason is that Apple has to focus more on cloud computing
to compete with Microsoft, it must enter the automobile sector
to compete with Tesla, it must also focus on other technological
advancements. You see, my guess is as good as a coin toss. I
might be wrong, but if Apple does not diversify its revenue
sources, then where will the growth come from? This explains
how we will need to be extra cautious about forecasting
earning’s growth into the future.
Other info
The revenues and Net Income for the previous five years
ending September 26:
________Revenues Net Income
FY20 $ 274,515 $ 57,411
FY19 $ 260,174 $ 55,256
FY18 $ 265,595 $ 59,531
FY17 $ 229,234 $ 48,351
FY16 $ 215,639 $ 45,687
(In millions)
The stability in income makes the job of forecasting
earnings easier. In April 2020, the Company announced
an increase to its current share repurchase program
authorization from $175 billion to $225 billion and raised
its quarterly dividend from $0.1925 to $0.205 per share
beginning in May 2020. During 2020, the Company
repurchased $72.5 billion of its common stock and paid
dividends and dividend equivalents of $14.1 billion. This
is another positive because this increases the
shareholder’s value (given the price paid is reasonable)
The iPhone accounted for 50% of 2020 net sales, down
12% by 2018 (62%). The company’s wearables, home and
accessories segment has grown more than 75% and in
last 3 years and has 11% share in revenues as of 2020.
The revenues from the iPhone have also declined from
$164,888 (2018) to $137,781 (2020) [in millions].
The company’s gross margin from the services segment is
at 66% as against 31.5% which is not surprising. The
overall gross margin is 38.2%. The return on equity for
FY20 was 87%. The total term debt was at $107 billion at
the end of FY20.
The company is really efficient, as evident by the
numbers. The management has consistently delivered in
the past, with the innovative culture of the company, I
expect the future to be even better.

I will provide analysis of the financial statements and

valuation in the next section.
 (2) Financial Statements and valuation

I am not reviewing the quarterly reports (10-Qs) because

the disruption caused by the pandemic can mislead us. I
believe a little change in the financial numbers are
insignificant. What counts is how the management
works. Loss of a billion dollars or more temporarily is
acceptable; only the long-term goals matter if you
investing with a businesslike approach.
Some people stress a lot about quarterly figures, Apple
has reported in its 10-K that the sales increase
considerably during the festive season. Hence, anyone
looking at a temporary festive season growth who
compares quarterly reports will assume that the
company has improved in a short period of time.
In fact, I would’ve been much more excited if I could see
a temporary loss in any company (given that the long-
term future is safe), this will drive the stock price down,
creating bargains. In this analysis, I will focus more on
past performance to balance out the covid effect.
THE BALANCE SHEET (As of Sept 26, 2020)
Starting off with the balance sheet:
The company’s net PPE (Property, Plant and Equipment)
are at 36 billion USD (net of 66 billion USD depreciation)
while the total cash is 38 billion USD. The company has
150 billion USD in marketable securities comprising
treasury securities, US agency securities, deposits,
commercial paper, corporate debt securities, municipal
securities and Mortgage-Backed-Securities (MBS).
The total term debt is 106 billion USD (out of which 8
billion is current portion of term debt), Lease costs
associated with variable payments on the Company’s
leases were $9.3 billion for 2020 and the company has
also issued commercial paper totaling 5 billion USD in
value.
Total shareholder’s equity is 66 billion USD, this might
feel like the company is a bit over-leveraged, but in
reality, the cost of debt for the company is really low.
This makes leverage (to some extent) attractive for the
company.
THE INCOME STATEMENT
The revenues and income table for the previous 5 years:
_______Revenues Net Income
FY20 $ 274,515 $ 57,411
FY19 $ 260,174 $ 55,256
FY18 $ 265,595 $ 59,531
FY17 $ 229,234 $ 48,351
FY16 $ 215,639 $ 45,687
(In millions)
The steady growth in revenues and income along with
high margins certainly proves that the company is
excellent in capital management.
On a diluted basis, the earnings per share for the
previous three years (FY20, FY19 and FY18) were $3.28
$2.97 $2.98. The other line items were in proportion to
the increase in sales for the previous years. The R&D
expenses are most important for this company, totaling
about 7% of the revenues.
THE CASH FLOW STATEMENT
The net cash from operations for the years FY20 and
FY19 were $80,674 and $69,391 [Millions] respectively.
The capital expenditures for the same were (7,309)
(10,495) [million USD]. Thus, the company generated
around 73 billion USD in Free Cash flow in FY20 and 59
billion USD in FY19.
The company uses a lot of this FCF to repurchase shares,
The total repurchased for the last 3 years averaged more
than 65 billion USD each year. The company also pays
out an average of 14 billion USD in dividends.
Share repurchases are only sensible if the price paid is
less or in line with the intrinsic value. The average price
paid for the repurchases made in FY20 ranged from 94$
to 115$. In total, 64 million shares were delivered under
this ASR (Accelerated Share Repurchase) arrangement at
an average repurchase price of $94.14.

This covers the basic financial data; I will provide some

key ratios in the next page and then do the valuation.
KEY RATIOS

Return on Equity* 87.87%

Return on Assets* 17.73%
Current Ratio^ 1.14
Gross Margin Ratio* 38.23%
Operating Margin Ratio* 24.15%
Net Margin* 20.91%
LT Debt-to-Equity^ 157%
Total Debt-to-Equity^ 175%
Source:
* https://www.stock-analysis-on.net
^ https://in.investing.com

The margins display the efficiency in management, this

helps because I can be much more confident about my
forecasts (at least in the long run). This also means that I
don’t need a huge margin of safety (I mentioned 25%
earlier but I will only be deducting 10%).
VALUATION
The valuation of Apple is much easier than any other
company I've analyzed, this is because of the predictable
cash flows and trustworthy management.
I am being conservative with the predictions, Using 7.5%
growth on FCF for years 1-5 and 5% for years 6-10. I will
use perpetual growth rate of .5%. I’m using discount rate
as 6% because risk-free-rate in the US is too low

I’ve shared my excel calculation of Apple’s intrinsic value

in the next page.
 Nominal Discounted
Year
Value Value
USD
0
73.00
USD USD
1
78.48 74.03
USD USD
2
84.36 75.08
USD USD
3
90.69 76.14
USD USD
4
97.49 77.22
USD USD
5
104.80 78.31
USD USD
6
110.04 77.57
USD USD
7
115.54 76.84
USD USD
8
121.32 76.12
USD USD
9
127.39 75.40
USD USD
10
133.76 74.69
USD USD
10
2,444.08 1,364.76

The intrinsic value as calculated is 2.1 trillion USD, the

current market cap is 2.2 trillion USD, If I deduct 10%,
then the intrinsic value would be 1.8 trillion USD only.
 (3) Conclusion
Who should buy this stock?
Apple as of today is not certainly overvalued, I would say
the fair price ranges from anywhere between 1.8 trillion
USD to 2.1 trillion USD (if growth prospects are high), if
you change the numbers a bit, then you can get really
different results. This is the problem with valuation, you
cannot be certain about everything.
To counter this problem, you need the ability to forego a
lot of investment opportunities, Like this one. This
certainly won’t qualify as a buy for me even if it was
trading at say 1.5 trillion USD. The reason behind this is
that at best, you can only make twice or thrice your
money in the long run. If your capital base is low, then
there are a lot of better opportunities.
But still, for some risk-averse people, Apple might qualify
as a good investment. If you are looking to diversify your
portfolio primarily in blue-chip stocks, then Apple should
surely be included.
I have tried to explain the concept of Mr. Buffett’s
‘Economic Moat’ in the appendix.
 (4) Appendix

ECONOMIC MOAT
Economic Moat is a term popularized by legendary
investor Warren Buffett; economic moat can be defined
in simple terms as a competitive advantage the company
has over its competitors.
Competitive advantage is important because it
distinguishes a good company from a great one, a
company that has this economic moat can earn higher
profits and have higher margins.
Apple is a great example of a company having an
economic moat. The consumers prefer Apple devices
even if they have to pay a premium price. Moreover,
with multiple devices like the iPad, the iPhone, the Mac,
etc., Apple has created an ecosystem which gives it an
advantage over the others.
Economic moats can be different for different
companies, sometimes they play a huge factor in
company’s earnings and in many cases, they are non-
existent.
Another example of an economic moat is asset
replacement cost. Consider an industrial company, one
would need to invest a lot to compete with an industrial
company. This gives the advantage over new
competitors, not the existing ones. To have an advantage
over the existing competitors, the company would need
some other kind of moat, like consumer loyalty, low-cost
production, patent protection, etc.
The concept of moats is important to understand
because in the long run, moats can help companies
defend itself from a lot of adverse changes.
To know more about it, I highly recommend you to read
‘Competitive Advantage’ by Michael Porter.
With this, I end my analysis of Apple Inc. In the next
section, I’ve provided all the references.
 (5) References
• Apple: Annual Report (10-K). [Online] 2020. Available
from https://investor.apple.com/sec-
filings/default.aspx
• Money: Apple. Analysis. [Online] 2021. Available
from https://www.msn.com/en-
au/money/stockdetails/analysis/nas-aapl/fi-a1mou2
• Investing.com: Apple. Financials. [Online] 2021.
Available from
https://www.investing.com/equities/apple-
computer-inc-financial-summary
• Stock-Analysis-on: Apple. Ratios. [Online] 2021.
Available from https://www.stock-analysis-
on.net/NASDAQ/Company/Apple-
Inc/Ratios/Profitability
• Investopedia: Economic Moat. [Online]
2021.Available from
https://www.investopedia.com/ask/answers/05/eco
nomicmoat.asp
(Accessed 24th June, 2021