The Apple Is On A Roll

Anybody who doesn’t know about iPhone, iPad, or iPod? It seems the California-based company is enjoying the best time of its life, or maybe times are getting even better in the months and years to come. After good quarterly figures, the company looks as strong as never before. Where is the company today in the hit list of the most expensive enterprises in the world? Will its share price rise and reach out to the moon?

The quarterly figures released by Apple on 24 Jan 2012 were impressive. These were the results for the quarter finished end of Dec 2011. Quarterly revenue jumped from $26.7 billion in Dec 2010 to $46.3 billion in Dec 2011. Gross margin has increased to 44.7%. The company is in excellent health with essentially no long-term debt, nothing owed to lenders and banks. Instead it is flush with cash and struggles to find the best and safe investments for a pile of earnings that have accrued over time. The pot of cash and funds put aside and not directly used for running the business was larger than $80 billion in Sept 2011. Well done. Lots of savings indeed.

iPhones and iPads have been very attractive products indeed, selling around the Globe like hot cakes. As everybody who wants to enjoy actually outstanding consumer products (or if that is not the primary motivation to at least show off being in possession of one) goes and buys one of these touchscreen products, revenue is growing strongly. As costs have been kept well under control, earnings translate into cash flow. Strong cash flow fills the coffers and increases the value of the company in the market place.

Today, the company which trades at the Nasdaq stock exchange, is worth $417 billion for its shareholders. That is a remarkably high price tag. How does the value of the company’s traded shares altogether, called the market capitalisation, compare to the one of other high-tech companies?
Here is our little comparison table. It shows the market capitalisation (value to shareholders) in billions of US dollars from 29 Jan 2012 (source Yahoo! Finance):

Apple 417
Exxon 411
Microsoft 245
General Electric 201
Google 188
Procter & Gamble 176
AT&T 172
Oracle 142
Samsung Electronics 133
Verizon Communications 105
Cisco 105
Amazon 88
Boeing 55
Nokia 19
RIM (Research in Motion) 8.7

The conclusion is that Apple ranks very high in this hit list. Looking into Apple’s accounts as published back in Sept 2011, we find that the company, which also provides iTunes, has its coffers full to the tune of around $80 billion or $80,000 million or 80,000,000,000 dollars. So, in principle, it could buy RIM as an aperitif, then Nokia as the main course and pay the market value of their shares in cash. That leaves $52 bn. Not enough to also acquire Microsoft to get hands on the operating system that powers the new Nokia phones. But nearly enough to purchase Boeing Company together with all its airliners still queuing in the production line, for a change, and still pay mostly with cash, from actual cash or marketable securities turned into cash.

This is very impressive and an extraordinary success story. Where will the company go from here? If success continues, brilliant designers and engineers innovate as they have done in the last years, the story will go on as well, including the rise of Apple’s share price. An interesting question may be how the company is valued today by financial markets. Fairly priced? Undervalued or overvalued?

We have done a short and simple analysis to get a handle on that question. Yahoo! Finance tells us an enterprise value of $386 billion from which we derived a fair market value of Apple’s equity of $457 billion. Our own calculation using a couple of simple estimation models arrives at an estimate of $479 billion. The company is today worth $417 billion (Yahoo! Finance). The truth will be somewhere between all those figures. One possible conclusion is that despite the share price having risen to the sky over the last several months, it may still have room to go even higher to reach its ‘true’ value. Of course, the price of Apple’s stock may equally fall if anything goes wrong, with the wider economy or with any of the factors that influence the company’s future success. Many of them are discussed in the annual report. For details of our analysis, see the paper here. It gives ideas about how to value the company, how we arrived at above valuation and also considers what would happen if things actually went wrong. Of course, nobody can read the crystal ball.

Disclaimer: The author is neither intending to provide or is giving any financial advice. No investment recommendation is made. Above corporations are solely mentioned for the purpose of illustration.